Ellason lens on… The QCA Corporate Governance Code

Tue 12, December

The Quoted Companies Alliance (QCA) Corporate Governance Code (‘Code’), which is applied by over 900 companies, including 93% of shares traded on AIM, has been updated. The changes take effect for accounting periods starting on or after 1 April 2024.

The Code is structured around ten Principles and accompanying ‘application’ notes. For a company to state that the Code has been adopted, it is necessary to apply the ten Principles and explain how they have been applied. Where a company chooses not to apply – or is unable to apply – a particular Principle (or Principles), it can provide an explanation for why. The QCA encourages companies to explain why certain arrangements are appropriate for their own individual circumstances.

Below, we summarise the key updates relating to remuneration:

Principle 9: A new Principle on remuneration

The QCA has added a new principle to “establish a remuneration policy which is supportive of long term value creation and the company’s purpose, strategy and culture”. The policy should be motivational and promote the long-term growth of shareholder value.

The accompanying ‘application’ notes include the following:

  • The remuneration policy and implementation should support the company’s purpose, strategy, culture and stage of development. Practices should promote good behaviours and decisions;
  • Pay structures should be simple and easy to understand and foster alignment with shareholders, primarily through shareholdings;
  • The Remuneration Committee should consult with other Board Committees in order to set appropriate incentive targets and appraise the performance against them;
  • Annual remuneration reports should be put to an advisory vote, as should remuneration policies if binding votes are not required. The QCA recommends that larger companies put their policy to a binding vote if they wish to follow best practice. Share schemes and long term incentive plans should also be put to a shareholder vote given the scale and dilutive impact of such plans.

Ellason commentary: This Principle and the accompanying application notes mirror those already published in the 2020 QCA Remuneration Committee Guide. The inclusion of this content in the updated Code demonstrates that remuneration is an area where investors and stakeholders want to see better disclosure, and this is a principle that we support. However, the call for separate vote(s) on remuneration runs counter to the lighter touch regulatory regime of AIM compared to the Main Market. While doing so provides an opportunity for better oversight on pay and its governance (and avoids shareholders having to register their dissatisfaction with remuneration decisions by voting against the re-election of directors or the annual report and accounts), this new expectation – and the additional disclosure it requires – is likely to be burdensome for those companies (the majority of the AIM) that currently do not put remuneration resolutions to a vote.

Whether companies align their voting practices with the latest QCA Code (or indeed the expectations of the Main Market) over time, or choose to retain greater flexibility and explain why that is appropriate, remains to be seen. Where applicable, we recommend providing a clear and well-reasoned explanation for any departure from this (or other) Principle(s), as part of broader corporate governance reporting.

It is also unclear if there will be sanctions for non-compliance, noting that the QCA does not monitor the application of the Code; instead, it is left “… for investors and other stakeholders to make a judgement on the adequacy of individual companies’ disclosures and practices against it”.

Principle 6: Remuneration Committee expectations and NED fees

The QCA Code recommends that remuneration committees comprise a majority of independent NEDs and ideally should be fully independent. Committee members must resist inappropriate demands and commit sufficient time to the role to develop the required skills and knowledge.

The Code also discusses NED remuneration, acknowledging the merit in paying some of the NED fee in equity, where appropriate, and noting that for smaller companies this may be a preferred approach. The QCA is hesitant about using performance-related schemes as these may undermine the objectivity and independence required of NEDs.

Ellason commentary: The Code recommends that NEDs should rarely participate in performance-related remuneration schemes; and only a small proportion of AIM NEDs participate in equity-based incentives. Where such schemes have been introduced, we recommend providing an explanation as to why they are deemed beneficial and including details of how the company consulted its shareholders to obtain support.

Please do not hesitate to contact any of the Ellason team should you wish to discuss this issue further.