The London Stock Exchange (LSE) has recently adopted rule changes that will require companies traded on its AIM Market to adopt a recognised corporate governance code from later this year.

Historically, the LSE has taken the view that, given the nature and range of companies that make up AIM's members coupled with AIM's nominated adviser system, a formal requirement to comply or explain against a particular code was not appropriate. However, the LSE has supported the use by AIM companies of the Corporate Governance Guidelines for Small and Mid-Size Quoted Companies published by the Quoted Companies Alliance (the QCA Code) or, where appropriate, the UK Corporate Governance Code (which is compulsory for premium listed companies). In practice, a significant majority of AIM-traded companies choose to follow the QCA Code, while others have opted to apply the UK Corporate Governance Code to some degree and some overseas companies have followed an overseas code.

In late 2017, the LSE consulted on introducing into the AIM Rules a formal comply or explain approach to corporate governance. The LSE believes comply or explain is a helpful approach to yield the long-term benefits that good corporate governance can bring.

The LSE has now adopted the proposal into the AIM Rules meaning that from 28 September 2018:

  • An AIM company will no longer be able to state that it has not adopted a corporate governance code.
  • The company will need to provide details on its website of:
    • the recognised corporate governance code that the board has decided to apply;
    • how the company complies with that code; and
    • where it departs from its chosen corporate governance code, an explanation of the reasons for doing so.
  • There will be flexibility around which governance code an AIM company may choose, as the LSE considers it preferable for AIM companies to have a range of options to suit their specific stage of development and size. The proposed rule change only requires that the chosen code is a "recognised" one. Well-established benchmarks for AIM companies include, as already mentioned, the QCA Code and the UK Corporate Governance Code. However, for some companies, for example a company admitted to another market, it may be more appropriate to report using its home jurisdiction standards.
  • The LSE will expect AIM companies to ensure that they provide meaningful information to investors so investors can understand an AIM company's approach to governance.

These changes come as corporate governance generally is under the spotlight. Both the QCA Code and the UK Corporate Governance Code are undergoing review, and the government is planning legislative reform in the areas of executive pay and strengthening the voice of employees and other stakeholders.