This article summarises the principal changes included in the revised version of the Association of Investment Companies (AIC) Code of Corporate Governance (AIC code) and why this will be relevant for boards of directors of certain Guernsey companies.
The AIC code is a framework of best practice for the governance of investment companies. It has been endorsed by the Financial Reporting Council (FRC) and the Guernsey Financial Services Commission (GFSC), and is supported by the Jersey Financial Services Commission (JFSC).
The revised AIC code may be relevant to boards of directors of Guernsey companies whose shares are quoted or listed on any of the London Stock Exchange's (LSE's) markets.
Investment companies whose shares are admitted to the LSE's main market with a premium listing may choose to use the AIC code to meet their obligations under the UK Corporate Governance Code (UK code), which was issued by the FRC.
While companies whose shares are admitted to the LSE's main market with a standard listing or to the specialist funds segment are not obliged to comply with the UK code or AIC code, they will often choose to use the AIC code in order to demonstrate a commitment to high standards of corporate governance.
Investment companies whose shares are quoted on the Alternative Investment Market (AIM) may choose to use the AIC code as their "recognised corporate governance code" in order to meet the requirements of AIM Rule 26.
The AIC code is popular with closed-ended Guernsey investment companies because corporate governance within the closed-ended investment company industry differs from other companies and the code is tailored accordingly.
Guernsey investment companies that report against the AIC code are not required to report separately against the Finance Sector Code of Corporate Governance (Guernsey code), which was issued by the GFSC.
In order to retain the existing endorsement of the AIC code by the FRC, the AIC has worked to align the AIC code with the new version of the UK code, which was published in July 2018. The revised AIC code was published in February 2019.
There is now just one AIC code which covers UK, Guernsey and Jersey member companies.
In place of the previous 21 principles and detailed recommendations, the revised AIC code (set out in Sections 5 to 9) adapts the UK code's principles and provisions to make them relevant for investment companies.(1)
Because the AIC code closely reflects the UK code's principles and provisions, there is no longer a need for the AIC Corporate Governance Guide (the AIC guide), which previously mapped the recommendations of the code to the AIC code. The AIC guide has been withdrawn.
Adapted principles and provisions of the UK code Although the AIC code closely reflects the UK code's principles and provisions, these are adapted by the AIC to make them relevant for investment companies. Drafting notes are included to highlight where content from the UK code has been incorporated in whole or in part, together with the AIC's own supplementary guidance. Therefore, directors of Guernsey investment companies are urged to carefully review the whole of the revised AIC code.
Reporting against Section 172 of the UK Companies Act 2006 The revised AIC code has retained the UK code requirement that the board should understand the views of the company's other key stakeholders and describe in the annual report how their interests and the matters set out in Section 172 ("Duty to promote the success of the company") of the UK Companies Act 2006 have been considered in board discussions and decision making. This applies irrespective of where the company is domiciled, provided that it does not conflict with local company law. Therefore, this represents a significant change for boards of Guernsey investment companies to consider, in addition to their existing duties under Guernsey law.
Tenure of the chair Unlike the UK code, the revised AIC code permits the chair to remain in post beyond nine years from the date of first appointment by the board. However, notwithstanding this flexible approach, each board should determine and disclose a policy on chair tenure. A clear rationale for the expected tenure should be provided and the policy should explain how this is consistent with the need for regular refreshment and diversity. The supplementary guidance states that a more flexible approach to chair tenure will help companies to manage succession planning in the context of the sector's different circumstances, while at the same time still address the need for regular refreshment and diversity.
Membership of audit committee Unlike the UK code, the revised AIC code permits the chair to be a member of the audit committee provided that they were independent on appointment (although the prohibition on the chair of the board being chair of the audit committee is retained). If the chair of the board is a member of the audit committee, the board should explain in the annual report why it believes this is appropriate.
The new AIC code applies to accounting periods which began on or after 1 January 2019; as such, Guernsey boards are urged to:
- review their existing corporate governance arrangements;
- determine which code is applicable to their companies; and
- determine whether they are ready for the changes.
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(1) Details on some of the changes brought in by the new UK code are available here.