Put simply, corporate governance is the framework, or the guidelines, for ensuring responsible business practice. Governance codes guide and form best practice, giving shape to the way companies and their directors operate, and setting standards for transparency and accountability.
The Quoted Companies Alliance (QCA) Corporate Governance Code (the “QCA Code”) is a set of principles that are commonly used by Companies listed on the Alternative Investment Market (AIM). The current version, released in 2018, was developed as a practical, outcome-oriented approach to corporate governance that was tailored for small and mid-size companies, and has been widely adopted by nearly 900 companies. Following an extended period of consultation, the new QCA Code has been updated to build on the 2018 edition and provide companies with the tools to meet the best practice standards of governance. In this article, we dive into the updates and what the changes practically mean for companies that have adopted the new QCA Code.
The 2023 updates to the QCA Code, which will be effective from financial years beginning after 1st April 2024, are described by the QCA as an evolution, designed to better align with changing expectations for corporate governance. The updates focus on corporate purpose, environmental, social and governance (ESG) impacts, risk management, the structure of the board and stakeholder communications.
The New QCA Code updates at a glance
The ten principles of the QCA corporate governance code are categorised by their key objective. There are three main aims of the Code – to deliver growth, to maintain a dynamic management framework, and to build trust. While there are no changes to the categorisation of the principles, the areas to which changes to the Code have been made, along with a summary of their possible impact, are as follows:
Board structure: independence and diversity
One of the most significant updates to the new QCA Code is a development in the understanding and interpretation of independence of Directors. Previously, a minimum of two independent Non-Executive Directors (NEDs) were required, but it’s now expected that fully independent NEDs – including an independent chair – will make up at least half of the Board. Further, there is a greater attention on succession planning in the new QCA Code, not just of the Directors but also of the Senior Managers in the company.
This change will likely have the largest impact on businesses wishing to implement the QCA Code. Boards will need to review their composition to ensure true that at least half of the Directors can be considered as independent, and take appropriate steps to rectify if this is not the case.
There is also a renewed focus on the diversity of Directors. As well as ensuring the board has the required knowledge and skillsets, other dimensions of diversity including socio-economic background, nationality, gender, education, ethnicity and age, should be taken into account.
New remuneration principle
A specific principle has been included in the new QCA Code to better align remuneration policies with the company’s purpose, strategy, and culture, focused on the importance of motivating management for long-term growth.
Companies will therefore have to review their remuneration policies and processes as the updated Code states that shareholders should be granted a vote on both remuneration reporting and policies. Going forward, shareholders should be consulted if considering performance-related remuneration for non-executives.
Environmental, Social and Governance Considerations
Environmental, Social and Governance (ESG) factors have attracted increased attention in all areas of business, therefore a company’s approach to ESG has become an integral part of the new QCA Code. The changes specifically request that companies report on their ESG initiatives with reference to their long-term strategic objectives, and consider the impact on their shareholders, employees, and other stakeholders. ESG factors should be considered as a part of the decision making at the Board level and, companies will need to consider how these matters are subsequently communicated to their shareholders.
Employees as a key stakeholder
The new QCA Code urges Boards to have a greater focus on employees as a key stakeholder group. It recognises the importance of an engaged workforce and requires businesses to ensure their employees are treated in a way that aligns with the company’s values.
More granular risk management
This change extends the risk management principle to incorporate both internal controls and assurance activities to help safeguard businesses.
Taking a more granular approach to risk management, these changes may require companies to evaluate their current processes and introduce others where there are gaps. The updates place a focus on the role of the Audit and Risk Committee in its oversight of the risk management and internal control framework of the company, specifically considering risk appetite and ensuring that the external auditor can truly be considered as independent.
The role of a company secretary in navigating the new QCA code changes
The role of a company secretary is always critical in corporate governance, but particularly so when adopting new or changed frameworks. The duties of a company secretary may include:
- Supporting effective governance by ensuring a clear distribution of responsibility, a solid decision-making process, and opportunities for oversight and monitoring.
- Guiding and shaping the company’s vision, aiding in growth planning, and creating internal structures to ensure operational efficiency.
- With a keen eye on compliance, company secretaries help businesses stay compliant with legislative and regulatory updates, protecting the rights and interests of shareholders and stakeholders.
How MSP Company Secretarial can help
To effectively and smoothly implement changes to corporate governance, such as those brought about by the updates to the QCA Code, companies may leverage the expertise of company secretarial providers, like MSP Company Secretarial. Working with us, the process would look like:
- Gap analysis: The first step is a comprehensive gap analysis to identify areas for improvement and necessary provisions for compliance with the ten QCA principles.
- Assessment against principles: We will assess the company against each of the ten QCA principles, ensuring a thorough understanding of the governance landscape as it currently stands.
- Plan and implement improvements: Based on the analysis, we will outline a plan for improvements, taking into account the specific needs and circumstances of the company.
- Writing of the resolution: A written resolution will be passed, formalising the company’s commitment to adopting and implementing the Code.
- Necessary updates: We’ll ensure all necessary disclosures are updated, and the company’s website reflects the commitment to the latest version of the QCA Code.
The recent updates to the QCA Code reflect the evolving need and expectations for corporate governance. Companies adopting these changes will foster a culture of transparency, diversity, and sustainability, aligning business practices with principles that reflect responsible business operations. With the guidance of company secretaries and support from professional service providers like MSP Corporate Secretarial, businesses can navigate these changes effectively, ensuring a framework for long-term success.
To learn more about our services, or find out how we can help your business facilitate the QCA code changes, contact us today.