How the updated QCA Code builds better governance

Key changes to the Principles

Deliver growth

Principle 1

Much greater emphasis is placed on the importance of making the company’s corporate purpose the foundation of its strategy and business model, and clearly communicating that purpose in a clear and comprehensible way.

Principle 2

Again, the 2023 QCA Code places greater emphasis on establishing an ethical culture within a company that is clearly present and reflected in all aspects of the company’s business, including in communications both internal and external, and in how the board and senior leaders act. This principle also makes clear that the company’s cultural values should support the delivery of its stated purpose.

Principle 3

The guidance suggests that the management of shareholder relations is critical to good governance and that the board, led by the chair or senior independent director, should proactively ensure it engages with shareholders on governance matters. There is also an explicit expectation that controlling shareholders consider making arrangements to protect the rights of minority shareholders, even where not already required to do so, and a requirement for more detail to be disclosed regarding shareholder engagement activities.

Principle 4

The inclusion of environmental responsibilities within those stakeholder interests that the board is required to take into account signals an enhanced emphasis on the impacts of corporate behaviours in line with the increased social and governmental interest in ESG matters. The board is tasked with taking a more focused approach to social and environmental issues and how these are addressed and embedded within the company’s wider strategy and business model. Relationships with the workforce are also prioritised with a requirement to facilitate whistleblowing and ensure that the treatment of employees is in line with the company’s values.

Principle 5

Companies must now ensure that internal controls and assurance activities are included within their risk management processes embedded across the business. Companies also need to consider their supply chain and its role in risk management and take a balanced view of risks including those related to climate change. Much more detailed disclosure is required in annual accounts regarding how the board manages risk across the business and the processes and controls that have been implemented.

Maintain a dynamic management framework

Principle 6

The new code places greater emphasis on ensuring board members’ independence, by maintaining balance between executive and non-executive directors and ensuring that at least half the board, and any committees, are independent non-executives (or providing at least two independent non-executive roles) and ensuring a diversity of composition to avoid ‘groupthink’ at board level. Directors should seek re-election annually (in line with the UK Corporate Governance Code) so enabling shareholders to pass judgment on the performance and suitability of board members. The 2023 QCA Code also lists several factors that may be considered to affect the independence of board members. Again, a much greater degree of disclosure will be required in the annual accounts to give shareholders visibility on the processes adopted by the company to address the board structure requirements.

Principle 7

Governance structures must be maintained in line with the company’s culture and appropriate to its size and attitude to risk, and these should be monitored and adapted over time to grow with the business. The board and its committees should work together to ensure that the appropriate skills and knowledge (either at board level or via external advisers) are used in decision-making and continuous improvement is sought. The board should continue to monitor its balance of skills so that it can address governance issues concerning cyber security, emerging technologies and sustainability matters such as climate change.

Principle 8 

Succession planning is called out as being of key importance to the board, as well as ensuring an orderly approach to appointing senior leaders and board directors and making appropriate contingency plans. The board should continue to assess performance and skills gaps to ensure that no single person becomes indispensable.

Principle 9

This is a new principle that largely reflects the previous guidance on remuneration – but makes clear that the board must implement a remuneration policy that aligns with the company’s purpose, strategy and culture. Shareholders should have the opportunity to participate in an annual vote on the remuneration report and companies should consider giving shareholders binding votes on remuneration policy changes, as well as on new share schemes or major changes to existing schemes.

Build trust

Principle 10

In the main this principle remains as in the 2018 QCA Code but greater emphasis is given to disclosure in the annual report in general, and particularly disclosures of the challenges faced by the company relating to corporate governance during the year and how these were addressed. Additionally the board needs to ensure that any such disclosures are appropriate for its investors’ own reporting requirements, including those relating to sustainability.

Glass Lewis, a proxy advisory service, and a leading provider of governance solutions has welcomed the updates to the QCA Code and stated that it believes the changes “may encourage better governance and reporting practices at AIM companies. In particular…the revised approach to remuneration votes… will provide shareholders with further opportunities to express their views on executive remuneration…”

The 2023 QCA Code, and associated guidance, provides an accessible and pragmatic route-map to an enhanced standard of corporate governance and a recognised framework for more developed shareholder communications.

If you have any queries about the 2023 QCA Code, or corporate governance generally, please contact Elizabeth Delaney, a partner in our Corporate team.

You can view the QCA Code here: QCA Corporate Governance Code (2023) – The QCA.

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at July 2024. Specific advice should be sought for specific cases. For more information see our terms & conditions.