The Quoted Companies Alliance Revised 2023 Code

Since its inception in 2013, the Quoted Companies Alliance (“QCA”) Code (“Code”) has been enthusiastically adopted, with nearly 900 companies (of which 93% are listed on AIM and 25% are Standard Listed companies on the Main Market) opting to comply with its principles, rules and responsibilities.

Following extensive consultations with stakeholders, the QCA has delivered a revised version of its 2018 Code in an effort to continue to provide clear and practical guidance for small and medium sized public companies and help them achieve sound corporate governance.

Part of the Code’s historical strength derives from a flexible and voluntary approach to adoption. The Code uses a "comply or explain" model, allowing companies to elaborate on their reasons for not adhering to certain principles where divergence from the principles is allowed, so long as it is well reasoned and in the interest of creating shareholder value.

Below is a summary which lays out the primary ways in which the 2018 Code has been updated to reflect changing public expectations around governance, and encourage more companies to adhere to and benefit from the QCA’s guidance.

All references to Principles are from the revised 2023 Code.

Strategy, Business Model, and ESG

The new 2023 edition emphasises that companies should have a purpose as well as a strategy and business model that guides their decisions. This purpose should drive strategic thinking and the business model (Principle 1). The QCA Code now includes environmental responsibilities as part of a company’s stakeholder and social responsibilities, with companies being encouraged to incorporate environmental considerations into their long-term objectives, strategic thinking and risk management procedures (Principle 4).

Board Independence, Committees and Succession Planning

The Code expands on board independence, including as a principle that half of the board be comprised of non-executive directors (“NEDs”). This brings the Code more into line with the UK Corporate Governance Code recommendations. There should be a minimum of at least two NEDs. The Code provides a list of criteria to determine independence, such as level of director shareholding, length of board tenure and significant incentive pay arrangements. The Code underlines the need for transparency and for an explanation of potential conflicts of interest and stresses the need to explain in the annual report why the NEDs chosen are considered to be independent. Indeed, with the Code providing for directors be re-elected on an annual basis, investors have the opportunity to scrutinise potential conflicts of interest, especially when they have not been fully explained in a company’s published governance statements.

The Code advocates for the separation of the chair and the CEO role, with the chair running the board and the CEO managing the day-to-day operations. In cases where the chair and CEO are the same person, the Code recommends appointing a senior independent director to hold the CEO accountable. This is especially relevant when a newly listed public company experiences rapid growth and needs an experienced person to deal with public company leadership and oversight.

At their best, boards are constantly broadening their knowledge and skill sets by including people of varying genders, ethnicities, ages and socio-economic backgrounds and the Code supports such diversity on company boards. The Code further encourages boards to challenge groupthink and ensure their decision-making is built on a wealth of individual perspectives and relevant business input (Principle 6).

With respect to remuneration and audit committees, the Code suggests that companies have a majority of independent NEDs on each committee and strive for all members to be independent. Again, in a nod towards the UK Corporate Governance Code recommendations, the revised Code notes that while NEDs should be remunerated in line with their workload, boards should be mindful that performance-related remuneration schemes in the form of equity could affect, or appear to affect, the NEDs independence (Principle 9). The Code recommends that the annual remuneration report and remuneration policy be put to an advisory shareholder vote and that larger companies should consider putting the policy to a binding shareholder vote. The establishment or amendment of share schemes and long-term incentive plans should also be put to shareholder vote.

Finally, the Code has expanded on board performance and seeking continuous improvement, with succession and contingency planning being viewed as an essential board task for directors, senior management and key staff (Principle 8).

Representation of Minority Shareholders and Workforce Engagement

In general, the revised Code places emphasis on greater representation for minority shareholders and the workforce and communication is seen as critical to a constructive relationship between the board and shareholders and other stakeholders. The Code encourages that in tandem with submitting annual reports and accounts (including corporate governance, audit and remuneration committee reports) boards and executive leadership should regularly engage with employees and ensure feedback is fed back into board discussions. Employee practices should be consistent with the company’s values. (Principle 4).

The Code also recommends that companies consider putting in place a relationship agreement between any shareholder controlling 30% or more of the votes able to be cast at a general meeting of the company and for the company to protect minority shareholders and to add transparency and accountability. This is an interesting addition and we expect this was a reaction to the recent FCA consultation on the Listing Rules which had originally recommended removing the requirement for controlling shareholder agreements. The FCA has now also changed its recommendation and the controlling shareholder regime in the Listing Rules will largely remain as it is.

QCA Badge of Compliance

Finally, the Code has introduced the QCA badge as a mark of confidence. Companies are encouraged to adopt the Code, make relevant declarations on their website and/or in their annual report, and detail how they have applied each principle.

Transition and Implementation Period

The QCA allows for a 12-month transition period from 1 April 2024 for companies to adjust to the revised Code. After this period, the 2018 Code will gradually be phased out, and investors and stakeholders will begin to expect adherence to the 2023 Code. During this time, companies should review their governance arrangements, appoint responsible board members for stakeholder engagement, consider succession planning, update disclosures to align with the revised Code and, if one is not already in place, consider implementing a relationship agreement with any controlling shareholder.

It should also be noted that, in light of the requirement under the proposed reforms to the FCA’s Listing Rules that companies listed in the new ‘Equity Shares in Commercial Companies’ segment (which replaces the existing Premium and Standard segments) must adopt the UK Corporate Governance Code, it is expected that the QCA Code will, in future, be relevant only to companies listed on AIM or the AQUIS exchange, and those larger unlisted companies that choose to adopt it.