Good Governance: Board EvaluationsRead more
The rise of Governance Codes for AIM-listed & smaller, faster-growing businesses.
CFPro has been working with all sizes of high-growth businesses for many years. We’ve seen the highs and lows of growth, and we’ve seen how things should be done, and we’ve absolutely seen how things should never be done – and while good Corporate Governance is a critical tool that ensures long-term growth, it is still surprising that so many smaller, fast-moving, fast-growing businesses think that a solid governance structure doesn’t apply to them. In fact, the reality is, they, more than any other growing business, are probably exactly the businesses that needs to be considering a solid corporate governance structure first and foremost.
So, to help you get started, or to inspire action where action is needed, CFPro’s Sarah Jacobs shares her insight on what Corporate Governance is, and why your organisation possibly needs to be reviewing yours.
What is Corporate Governance?
Corporate Governance is the way the organisation is governed and how the organisation ensures it is well-managed and set to achieve its objectives. One of the most fundamental cornerstones of Corporate Governance is company culture; and culture is led from the top. A culture that demonstrates solid governance structures can be tricky to nail down, but there are almost always signs that point towards a great structure, or a structure which is being overlooked completely.
Unless those values, and that culture is actively led by the Chairman and Senior Directors of that business, what appears on the surface is anything but the true culture of that organisation. Culture is essentially what sets the standards of the company.
Signs of the (Corporate Governance) Times
There are a huge number of signs that point towards a business not being governed properly. Quite often, many of these indications lie within a company culture that is generally poor – usually evident through an unhappy workforce showing signs of significant employee churn, or even a dysfunctional board.
Another indicator, particular within the Oil & Gas and Mining sectors may be through their increasing numbers of lost time injuries and near-miss injuries where operationally, the business may not (for whatever reason) have the necessary good practice in place. Signs like these are quite often due to an operator trying to cut corners (reduce time, increase output) due to pressure from management to increase revenue (or, save a plant or division from closure), or worse, a leadership team that turns a blind eye to potential risk areas due to similar pressures. Poor governance would display itself through a work culture that takes more risks that ensue in an increase of injury because of a lack of effective operational process.
Governance that keeps Leadership teams in check.
Corporate Governance also exists to define the way a business puts structures in place to ensure that it is well-managed; something which extends directly to the leadership teams of any organisation. It ensures that the Board operates in the appropriate way that a Board is meant to operate and that it has the necessary level of checks and balances in place that reduce any inappropriate processes or behaviours.
It also details how the Board is run, and how the Board Committee is run. Each committee member has a term of reference, as does each Board member; all of which very clearly sets out what is considered to be acceptable and unacceptable behaviour.
Taking Corporate Governance a step further, it usually also includes clearly defining the specific roles expected of the Chairman, the Senior Directors, the Executive Directors and any other members of the leadership teams. Quite often, elements of governance expectations are detailed within individual contracts and services agreements and the letters of appointments themselves.
And when you look at some of the most critical business issues today; the strive for equality and diversity, transparency, data protection, growth strategies and digital transformation – good corporate governance structures will almost certainly ensure that the company makes the right decision, for the right reason. Dovetailing in with that is Equality and Diversity; having the right Board within a good Corporate Governance structure essentially means that the structures itself ensure that you avoid ‘group think’ and the unnecessary, inappropriate decisions that usually accompany.
The rise of Governance Codes for AIM-listed and smaller, faster-growing businesses.
Although Corporate Governance has traditionally been a tricky thing to nail down, it has become, and continues to be, a critical tone in business strategy. Corporate Governance is now set out by the FRC Corporate Governance Code 2018 and the QCA code. The publication of updated versions of both of these two codes indicated huge changes to the world of Corporate Governance in the UK and, alongside the FRC Corporate Governance Code which is for main-market listed companies, as opposed to AIM-listed businesses, the FRC Note on Board Effectiveness sits alongside this – all aimed at enhancing Corporate Governance in business.
And the driving force of the publication of these codes?
For over 20 years, there’s been a drive to run business better and it started with the publication of the Cadbury Code, a UK code of best practice concerning appropriate senior management remuneration, produced by the 1992 Cadbury Committee on the financial aspects of corporate governance, where the spotlight was turned onto the companies were run, leading to the publication of an initial set of standards. When the first Corporate Governance Code was published in 2010 by the FRC, the QCA (The Quoted Company Alliance) started to get more involved and started to focus specifically on Corporate Governance in AIM-listed companies. These companies are typically much smaller, much faster-growing, and don’t generally have the financial capacity to put an extensive Board in place with all the necessary checks and balances. In many cases, an AIM company may only have a few employees, and trying to apply the UK corporate governance code to a very small, fast-moving, fast-growing organisation was not working, leading to the QCA Code being developed to help address this in more detail.
The move from Tick-Box to an organic Comply & Explain practice.
Historically, earlier versions of the FRC Corporate Governance Code and the QCA Codes have tended to categorise compliance as a tick-box activity where businesses treated them merely as a means to an end, as opposed to a definition of culture lived and breathed and shared by every individual in that business. Main-market companies complying with the UK Corporate Governance Code have for a number of years been required to ‘Comply & Explain’ where businesses have to set out the areas where they weren’t in compliance with the codes, and in September 2018, the same was introduced for AIM-listed companies which were required to state which appropriate Corporate Governance Code they had adopted and disclose where they did not comply with it. This new approach moves away from a tick-box activity, and instead, invites participants to identify their general governance code through setting out and explaining how they adhere to the code, and explain where they don’t.
Mission-critical for smaller, fast-growing organisations
Sound Corporate Governance is quickly becoming the norm, and smaller businesses are realising the importance of having solid corporate governance structures in place. Many smaller AIM-listed companies will adopt the QCA Corporate Governance Code 2018 which has 10 principles of good governance.
These 10 principles include:
- Establish a strategy and business model which promote long-term value for shareholders
- Seek to understand and meet shareholder needs and expectations
- Take into account wider stakeholder and social responsibilities and their implications for long-term success
- Embed effective risk management, considering both opportunities and threats, throughout the organisation
- Maintain the board as a well-functioning, balanced team led by the chair
- Ensure that between them the directors have the necessary up-to-date experience, skills and capabilities
- Evaluate board performance based on clear and relevant objectives, seeking continuous improvement
- Promote a corporate culture that is based on ethical values and behaviours
- Maintain governance structures and processes that are fit for purpose and support good decision-making by the board
- Communicate how the company is governed and is performing by maintaining a dialogue with shareholders and other relevant stakeholders.
CFPro helps an AIM-company by going through these principles and working out how they apply each of these principles to their business. We highlight areas for improvement and help them put some very basic structures in place so that transparency throughout the business becomes the new normal. This may mean that we help them draw up their terms of references for their Board Committees and their Board, which may include setting out the parameters of each committee’s responsibilities and the responsibilities of committee member, as well as establishing the distribution channels for decisions taken and minutes of the meetings, so that the entire board can see what decisions are being made at committee level, even if they don’t sit on the committee themselves. We may also help set out the roles of the Chairman and Senior Independent Director.
Another area of increasing regulation which requires good processes and governance is share-dealing by individuals within organisations, and in particular compliance with MAR (Market Abuse Regulation). Whilst the ICSA Share Dealing Code is a good starting point, it is vital to put in place a share Share Dealing Code which is appropriate for that particular organisation. So, working closely with the senior team and the company’s NOMAD, we put in place structures and processes that not only are effective, but that are easy to comply with and that work.
Sarah Jacobs is a Company Secretary (GradICSA) with more than 15 years’ experience in the City advising both publicly listed and private companies. View her profile and read more about her experience in helping organisations get to grips with their Corporate Governance, here.