QCA Code refresh

CapitalQuarter - Spring 2024

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In its first review for five years, the Quoted Companies Alliance (QCA) has published a revised corporate governance code. Here’s a guide to the key changes.

This 2023 version of the code will apply for financial years beginning on or after 1 April 2024. Although it has been re-worked and re-organised, it maintains its principles-based approach to corporate governance. There is additional emphasis on emerging areas of investor interest and expectation, such as environmental and social governance (ESG)-related disclosures, compositions of the board and wider stakeholder considerations.

What is the QCA Code?

First introduced in 2013, the QCA Code is a practical governance framework which offers flexibility and helps companies of different sizes and backgrounds to adopt an approach to corporate governance that is based on certain principles. Where a company chooses not to, or is unable to, apply a particular principle, it can provide an explanation for not doing so through disclosures in its annual report or via its website.

The QCA Code is constructed around 10 broad principles and a set of disclosures. Principles 1-9 are designed to ensure that good governance practices are followed. Principle 10 deals with how this good governance is communicated and reported to shareholders and other stakeholders.  

The Code’s pragmatic approach means it has been widely adopted. There are some 900 companies currently applying it. These include around 93% of AIM-listed entities, many on the Main Market of the London Stock Exchange and three-quarters of those quoted on the Aquis Stock Exchange.

What are the key changes this time?  

Below are some of the notable developments for the 2023 code.

Wider stakeholder interests and ESG responsibilities (Principle 4)

Previously Principle 3 in the 2023 code, Principle 3 is now: Seek to understand and meet shareholder expectations. The revised code, now Principle 4, increases the focus on the workforce as a key stakeholder and asks that practices towards employees be consistent with the company’s values.

The new code has explicit references to ESG issues, including those relating to climate change. It recommends that ESG issues be incorporated into the company’s strategy, risk management and business models. Companies should provide both qualitative and quantitative disclosures in their annual report, including a description of ESG issues that the board has identified as being material.

Board independence and composition (Principles 6 & 7)

Board independence was previously included in the guidance section of the 2018 QCA Code, but this focus has been moved forward to be part of Principle 6 in the revised corporate governance tool.

It recommends the following:

  • All directors should submit themselves for election or re-election on an annual basis;
  • At least half of the board should be comprised of independent non-executive directors (NEDs). Boards are still expected to contain a minimum of two independent non-executives; and
  • Certain committees, such as the audit and remuneration committee, should have at least a majority of independent NEDs and, “ideally should aim for full independence”.

The 2018 iteration of the QCA Code allowed independence to be determined by the board. The revised 2023 publication is more dictatorial, requiring the board to consider a list of factors which may be considered to impair independence, including:

  • The length and tenure of the board;
  • Sizes of shareholdings;
  • Prior and/or current commercial or contractual relationships with the company or executive directors; and
  • Significant pay arrangements beyond a director’s fee.
Succession and contingency planning (Principle 8)

Succession planning for both executive and non-executive directors, senior management and key staff, is now a vital task for the board (with assistance from its nomination committee). No member of the board should become indispensable and board membership should be periodically refreshed.

The skills, experience, capabilities and background required for directors and senior management to support the next stage of a company’s development should be identified and factored into succession planning.

Companies should disclose their succession planning processes in their annual report and accounts, including any indicative timelines for expected appointments.

Remuneration (Principle 9)

This broadly aligns with the previous guidance on remuneration, but also recommends that:

  • companies devise and implement an effective remuneration policy;
  • pay structures for senior management be easy to understand and align with shareholder values;
  • shareholder votes be required for the annual remuneration report, remuneration policies and any amendments to existing employee share schemes or long-term incentive plans.

What are the deadlines?

A 12-month transition period will be implemented from 1 April 2024. The aim is to give companies long enough to adjust to the new Code and to build in the necessary operational and strategic capabilities to apply the principles in full. Initial disclosures against the 2023 code are expected in 2025.

For further guidance on the new QCA Code, please contact Calum McChrystal.