Legal development

The 2023 QCA Code in overview

The 2023 QCA Code in overview

    On 13 November 2023, the Quoted Companies Alliance published the latest version of its corporate governance code (2023 Code) aimed at 'UK Growth companies'. The 2023 Code is free for QCA members and available to purchase otherwise. 

    The 2018 iteration of the Code (2018 Code) has been applied by nearly 900 companies, including 93 per cent of those whose securities are admitted to trading on AIM, many constituents of the standard segment of the main market, and three-quarters of companies quoted on the Aquis Stock Exchange. 

    The Code was first published in 2013 and substantially overhauled in 2018. The QCA felt that, after a further five years, it was appropriate to review its content again. The 2023 Code will apply to financial years beginning on or after 1 April 2024 with the first disclosures expected in 2025.

    1.  Operation of the Code

    The 2023 iteration of the Code works in the same way as its predecessor. Companies should continue to apply the Principles, considering in each case various related expectations, and publish certain prescribed disclosures flowing from that application and the company’s resultant position. Where a company choses to depart from the 'application' of a Principle it must, as before, provide a 'clear and well-reasoned' explanation for doing so as part of its corporate governance reporting.

    The 2023 Code also retains the requirement for a Chair's Corporate Governance Statement as to how the 2023 Code has been applied. This includes additional content requirements (set out below).

    By way of reminder, AIM Rule 26 requires relevant companies to include on their website 'details of a recognised corporate governance code' that its board of directors has decided to apply, how it complies and, where it departs from its chosen code, the reasons for doing so. This information should be reviewed and updated annually with the website indicating the date on which that review took place.

    2.  The 2023 Code's Principles

    The 2023 Code continues to contain '10 Principles of Corporate Governance', divided into three themes:

    • Deliver growth.
    • Maintain a dynamic management framework.
    • Build Trust.

    The Principles are designed to focus on medium to long-term value for shareholders and to apply whether a company is widely or closely held.  The Principles have been re-ordered from the 2018 Code and, in some cases, re-shaped but in many cases remain substantively the same. Principles 6 and 9 from the 2018 Code (dealing with directors' skills and governance structures and processes respectively) have now been combined in Principle 7. Most significantly, a new remuneration-focused Principle 9 has been added.

    The Principles are as follows (words in bold are substantive changes from the 2018 version):

    Principle 1 (ordering unchanged from the 2018 Code)

    Establish a purpose, strategy and business model which promote long-term value for shareholders.

    Principle 2 (previously Principle 8 in the 2018 Code)

    Promote a corporate culture that is based on ethical values and behaviours.

    Principle 3 (previously Principle 2)

    Seek to understand and meet shareholder needs and expectations.

    Principle 4 (previously Principle 3)

    Take into account wider stakeholder interests, including social and environmental responsibilities, and their implications for long-term success.

    Principle 5 (previously Principle 4)

    Embed effective risk management, internal controls and assurance activities, considering both opportunities and threats, throughout the organisation. 

    Principle 6 (previously Principle 5)

    Establish and maintain the board as a well-functioning, balanced team led by the chair.

    Principle 7 (a combination of the previous Principle 6 and Principle 9)

    Maintain appropriate governance structures and ensure that individually and collectively the directors have the necessary up-to-date experience, skills and capabilities.

    Principle 8 (previously Principle 7)

    Evaluate board performance based on clear and relevant objectives, seeking continuous improvement.

    Principle 9 (new)

    Establish a remuneration policy which is supportive of long-term value creation and the company's purpose, strategy and culture.

    Principle 10 (unchanged)

    Communicate how the company is governed and is performing by maintaining a dialogue with shareholders and other key stakeholders.

    3. Key changes to consider

    The following is a non-exhaustive summary of the principal changes to the expectations relating to the application of the Principles and related disclosures. A number of these 'new' expectations have been brought forward from the guidance in Part 4 of, and other QCA guidance associated with, the 2018 Code:

    Corporate purpose (issue dealt with in Principle 1 of the 2023 Code and throughout)

    The 2023 Code places a greater emphasis on corporate purpose throughout its Principles and expects companies to clearly articulate what it is.

    Culture (Principle 2 and throughout)

    Similar to purpose, culture features more prominently in the 2023 Code. Companies are expected to disclose in considerably greater detail the nature of their culture, how it supports the company's corporate purpose strategy and business model, how the tone from the top supports that culture, how the board assesses and monitors it, and what corrective action was taken where actions notably deviated from it.

    Shareholder needs and expectations (Principle 3)

    Where a company has a controlling shareholder (for example, an investor controlling 30 per cent or more of the votes able to be cast at a general meeting) it should consider putting in place 'arrangements to protect minority shareholders which may include a relationship agreement'. This was previously contained in the accompanying guidance to the 2018 Code.

    The board is also expected to ensure proactive engagement with shareholders on governance matters. This should be led by the chair. Other directors, including board committee chairs, should make themselves available for this purpose.

    More granular disclosure of shareholder engagement is required in the annual report as is 'appropriate quantitative and qualitative reporting on the company's environmental and social matters to meet investor needs and expectations'.

    Considering stakeholders and ESG-governance (Principle 4)

    The 2023 Code has higher expectations in relation to workforce engagement and is more prescriptive in its expectations for whistleblowing procedures. It also places responsibility on the board for the governance and oversight of the company's approach to relevant environmental and social issues – these should be integrated into the company's strategy, risk management and business model and disclosed in the annual report accordingly. Associated KPIs used for tracking performance and forward-looking targets should also be set out.

    The company's website should explain who is responsible for stakeholder engagement and how feedback from this engagement makes its way into the board.

    Risk management, internal controls and assurance (Principle 5)

    The expectations of application of this Principle are considerably more granular than under the 2018 Code. This flows into the annual reporting requirements which now anticipate the disclosure of:

    • what the board does to ensure the identification, assessment and management of risk, both current and emerging, and how it obtains assurance that the risk management and related internal controls are effective;
    • how the risk governance framework and processes support the board's assessment of future prospects and viability/resilience considerations;
    • the company's governance around climate-related risks and opportunities, the process for identifying, assessing and managing climate-related risks and how these processes are integrated into the company's overall risk management framework; and
    • how the audit committee has monitored and formally considered auditor independence.

    Board effectiveness and diversity (Principle 6)

    In many respects, expectations as regards the application of this Principle have been moved forward from the guidance section of the 2018 Code. Of note are that:

    • all directors should submit themselves for election or re-election on an annual basis;
    • independent non-executives should comprise at least half of the board (as before), noting that the chair can count as independent for these purposes if they were considered independent on appointment and remain so. Boards are still expected to contain a minimum of two independent non-executives; and
    • key committees of the board, and in particular the audit committee and remuneration committee, should be constituted with at least a majority of independent non-executives and 'ideally aim for full independence'.

    While the determination of independence remains a decision for the board, for the first time the 2023 Code sets out a list of factors which may be considered to impair independence. It also continues to emphasise that non-executives should 'rarely' participate in performance-related remuneration schemes or have a significant interest in a company share option scheme and certainly not without prior shareholder consultation. How shareholder support was obtained for new non-executive performance-related remuneration must now be explained in the annual report.

    There is also a new expectation that the board will consider its own diversity in the widest sense, to ensure it has the necessary experience, skills and capabilities while avoiding 'groupthink'. It should assess how its collective and individual perspectives add to board discussions and ensure that there is sufficiently wide-ranging and business relevant input. This assessment should also feed into ongoing succession planning. Unlike the Financial Conduct Authority's Listing Rules, the 2023 Code does not set aspirational diversity targets.

    Considerably more granular disclosure of board composition is expected in annual reports in light of these expectations, with additional disclosure also being required as regards any restrictions on both executives and non-executives assuming external roles.

    Governance structures and director expertise (Principle 7)

    While the 2023 Code leaves the constitution of board committees to each company, it is clearer in its expectation that there will 'typically' be an audit, remuneration and nomination committee and that board directors should have the requisite skills to discharge their duties and responsibilities, including as regards cyber security, emerging technologies, and climate change. The need for continual board improvement is underscored with a need to disclose in an annual report how this updating and development of directors' knowledge and skills is achieved.

    Board evaluation (Principle 8)

    The 2023 Code is clearer in that it expects board performance to be reviewed annually and include 'opportunities for improvement with respect to the performance of the chair and the operation of the board and its committees'. Where an 'in-year' event triggers a review, this should be disclosed in the annual report.

    Succession planning should extend to contingency planning for the absence of key staff.

    Disclosure is expected of the board performance review process, plans for external board performance reviews and the succession planning process, including any indicative timelines for expected appointments.

    Remuneration (Principle 9)

    This new Principle and related expectations largely mirror the QCA's previous guidance on remuneration.

    The board must establish a remuneration policy which aligns with the company's purpose, strategy and culture. Annual remuneration reports should be put to an advisory vote and consideration given to affording shareholder a binding vote on remuneration policies.

    New share schemes, or significant amendments to existing schemes, should also be put to a shareholder vote.

    The communication of governance (Principle 10 and chair's statement)

    The importance of communication with key stakeholders in addition to shareholders is emphasised, as is the importance of reporting on sustainability matters.

    Challenges experienced in the year and how they were addressed at the board and/or through governance changes should be reflected on in the corporate governance statement.

    The chair's corporate governance statement remains a key part of this communication exercise with an expectation that this will now include additional disclosures such as the alignment of corporate governance practice with purpose, the outcomes of key governance-related developments, how the company's approach to governance ensures an effective board, and the evolution of governance arrangements and practices.

    4. Roles and Responsibilities

    Part 4 of the 2023 Code outlines the governance roles and responsibilities of the board, including the chair, senior independent director, non-executive directors and executive directors, of board committees, such as the audit committee, remuneration committee and the nomination committee, and of the company secretary.

    While there is some additional detail on the responsibilities and composition of some of these roles, the substance does not differ greatly from the description of those roles in the 2018 Code.  

    5.  Implementation and review

    The 2023 Code will apply to financial years beginning on or after 1 April 2024 with the first disclosures expected in 2025. Companies are encouraged to migrate to the new Code as the QCA intend to stop 'supporting' the 2018 version and believes that other stakeholders will cease to recognise it.

    The QCA has flagged that there is a transitional period of 12 months to allow companies to make necessary adjustments in adopting the revised Principles. During this period, companies will be able to focus on more use of explanations on certain areas where there have been changes to the Code with the expectation that companies communicate their plans to address gaps within timelines where possible.

    By way of reminder, the QCA does not monitor application of the Code, stating that it is for investors and other stakeholders to make a judgement on the adequacy of individual companies’ disclosures and practices against the Code.

    6.  Prepare now for compliance with the 2023 Code

    Companies which intend to migrate to the 2023 Code should consider undertaking a gap analysis between their current governance practices and the revised expectations of the 2023 Code.

    In particular, a company might consider:

    • Undertaking a board briefing on the changes and any gap analysis.
    • If a company does not have a corporate purpose, whether it should.
    • Revisiting the monitoring and assessment of culture and board engagement with the process and outputs.
    • Reviewing board and committee structures and membership, particularly issues of director independence.
    • Reviewing constitutional documents, particularly schedules of matters reserved for the board and board committee terms of reference.
    • Reviewing board and senior management diversity policies and succession plans. Consider producing a board and senior management skills matrix should those not exist.
    • Considering any policy on external appointments and conflicts of interest and, if the company does not have one, whether it should.
    • If the company has a controlling shareholder, revisiting the adequacy of relationship management arrangements.
    • Mapping stakeholder engagement activities, particularly those with shareholders and the workforce.
    • Review whistleblowing procedures and the board's visibility of any reports received under it.
    • Reviewing the board's responsibility for environmental and social issues relevant to the company, evaluating (or introducing) relevant KPIs and forward-looking targets as appropriate.
    • Undertaking a review of internal controls and the company's enterprise risk management systems and assurance procedures relative to the 2023 Code's expectations, particularly as regards climate-related matters.
    • Reviewing board and committee induction and update training programmes.
    • Reviewing plans for board performance reviews in light of the 2023 Code's expectations.
    • Reviewing any existing remuneration policy and plans for new share schemes and proposed shareholder engagement activities in light of them.

    The information provided is not intended to be a comprehensive review of all developments in the law and practice, or to cover all aspects of those referred to.
    Readers should take legal advice before applying it to specific issues or transactions.


    Stay ahead with our business insights, updates and podcasts

    Sign-up to select your areas of interest