QCA Corporate Governance Code 2023: new standards on internal controls, board composition and remuneration
By Jacob Pitt, 13 November 2023
The Quoted Companies Alliance has today published its updated QCA Corporate Governance Code (2023 Code). The QCA Code is specifically designed for small and mid-cap companies, with more flexible governance recommendations than the FRC’s UK Corporate Governance Code. The vast majority of AIM companies have adopted the QCA Code, and it is also adopted by Aquis companies and some businesses listed on the Main Market.
The 2023 Code retains the structure of the 2018 version (2018 Code) but it has evolved to incorporate changing expectations in public markets relating to company purpose, ESG, internal controls, board composition and director remuneration. The 2023 Code will apply to financial years commencing on or after 1 April 2024. The key updates to the 2018 Code are outlined below.
It is worth noting that the 2023 Code retains a flexible approach. Where expectations are not appropriate for a particular company, the reasons for non-compliance (and any steps taken towards future adherence) can be disclosed.
Company purpose
Principle 1 has been updated to specifically refer to the necessity to establish a company’s purpose, in addition to the business model and strategy which follow as a consequence of that purpose. Principle 1 expects the board to have specific and measurable long-term objectives against which it can measure its success and delivery against its stated purpose. A disclosure of the company’s purpose in the Strategic Report is expected.
Investor relations
Principle 3 which requires companies to seek to understand and meet shareholder needs and expectations remains intact. Additional application requirements have been included such that companies with a controlling shareholder holding more than 30% of the voting rights are advised to consider arrangements or agreements to protect the interests of minority shareholders. It is also recommended that boards proactively engage with their investors on governance matters. Annual report disclosures to meet investor needs around environmental and social matters are required.
ESG
Principle 4 of the 2023 Code, which requires companies to take into account wider stakeholder interests, has been updated to include environmental responsibilities alongside “people stakeholders” and social responsibility. Boards should identify social and environmental issues that are relevant to the company and disclose any related KPIs. Companies are also expected to disclose who is responsible for stakeholder engagement, noting that responsibilities might be assigned to individual directors or board committees.
The 2023 Code specifically calls out the workforce as a key area for attention with companies expected to ensure that their approach to their workforce is consistent with their values. The 2023 Code also expects mechanisms to be in place to enable employees to raise concerns in an appropriate manner. This could be addressed via a whistleblowing policy, for example.
Risk and internal controls
Internal controls are expected to be a key feature of the FRC’s updated UK Corporate Governance Code next year and attention to this topic has trickled down to small and mid-cap firms. Principle 5 of the 2023 Code goes beyond just risk management to also encompass internal control and assurance. It advises boards to ensure that all potential risks are considered on a proportionate and material basis (including climate change), review the robustness of enterprise-wide internal controls, ensure appropriate assurance is sought and ensure the external auditor is seen to be independent of management.
Additional disclosures in the annual report will be required in respect of risk and controls, including climate risk and opportunities. Audit Committees will also need to outline how they have monitored the external auditor’s independence.
Board composition and independence
The application criteria of Principle 6, which requires a company to establish and maintain the board as a well-functioning, balanced team led by the chair, have been significantly expanded.
Appointment
Directors should be tabled for re-election on an annual basis, bringing it in line with the UK Corporate Governance Code and common practice amongst larger QCA-adopting companies.
Composition
It is now expected that at least half of the board be comprised of independent NEDs and in any event include no fewer than two independent NEDs. This reflects the shareholder expectations detailed in the guidance of the 2018 Code but now has more weight as part of the application of the principles. The 2023 Code clarifies that the chair of the board, if independent upon appointment, can be included in the independent NED count. For example, a board comprising a CEO, CFO, independent chair and independent NED will meet the numerical requirements although it will still be necessary to consider whether as a group they have the right balance of skills and experience. A majority (and ideally all) of the members of audit and remuneration committees should also be independent NEDs.
Independence
Under Principle 6, boards should be alive to real and perceived impediments to independence. Whilst the 2018 Code simply left the assessment of ‘independence’ to the board, the 2023 Code sets out certain factors which may indicate an impediment to independence (and boards are advised to be aware of a perception of impairment as well as reality). These include tenure, size of shareholding, commercial relationships with the company, relationships with executive directors and additional remuneration. However, it should be noted that it does not go so far as to apply metrics to those factors – for example, unlike the UK Corporate Governance Code, it does not state that tenure in excess of nine years would deem a NED to no longer be independent.
It is also recommended that independent NEDs should avoid participation in performance-related remuneration schemes, in order to maintain independence. This reflects a generally accepted point. However, should a NED be included in such a scheme, it must disclose how it is proportionate and how shareholders were consulted. This reflects the guidance of the 2018 Code but has been brought into the application criteria with an annual report disclosures added..
Diversity
The new QCA Code encourages companies to give consideration to the board’s diversity in terms of socio-economic backgrounds, nationality, educational attainment, gender, ethnicity and age. However, it also encourages thinking around deep diversity – having a range of perspectives on the board that can contribute to debate and avoid “group think”.
Board performance evaluations
The 2023 Code now states in the application guidance to Principle 8 that boards should (rather than may) conduct an annual performance review, which can be carried out internally and supplemented periodically by external evaluation. Disclosures in the annual report must be made as to when the last external evaluation took place and, if there are no plans for an external valuation, why not. It is also recommended that succession plans be in place for executives, non-executives and members of senior management.
Remuneration
A perennial hot-button topic, the 2023 Code contains a new Principle 9 pertaining to remuneration. Principle 9 requires companies to put in place a formal remuneration policy that is supportive of long-term value creation and the company’s purpose, strategy and culture.
The Principle 9 application requirements also state an advisory vote on the remuneration report should be tabled at the AGM. The remuneration policy must be formally set out and should also be put to an advisory vote (unless a binding vote is mandated). Larger companies should consider a binding vote on the policy even where not mandated. New or significantly changed share plans should be subject to investor approval. This is a significant new requirement in the 2023 Code.
Contact us
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ONE Advisory’s Corporate Governance, Compliance and Company Secretarial team’s expertise and knowledge of best practice in small and mid-cap growth companies can ensure that your board receives the advice and support needed to facilitate good corporate governance.