On 4 June, Sir Winfried Bischoff spoke at the Quoted Companies Alliance Conference in London. The plain text version of Sir Winfried's speech (PDF)
Many thanks to the QCA for inviting me to speak today.
The work of the QCA is instrumental in ensuring small and mid-cap companies can operate, and grow, in an appropriate regulatory environment.
- Promote a long-term investment culture
- That reduces the costs of raising capital
- and, more importantly perhaps, raises awareness of the sector
These three elements are essential in ensuring smaller companies become the engines of growth that they have the potential to be.
The FRC has excellent relations with the QCA. The QCA has developed a corporate governance code specifically for your members which sits alongside the FRC’s UK Corporate Governance Code, and helps quoted companies put into practice appropriate governance arrangements. It is widely recognised as the industry standard for growing companies which do not yet apply the FRC’s Code.
You, more than most, know that smaller quoted companies are critical to generating future jobs and growth in the economy. But they need access to capital to invest and grow. At the same time they often have limited resources and they face challenges in governance and reporting. The FRC has undertaken a number of initiatives aimed at ensuring all sizes of company put in place governance arrangements that uphold London’s reputation as a beacon for good governance and reporting that make it such an attractive place to list.
Probably the most integral element of good governance though, is good company culture.
Often smaller quoted companies have a majority shareholder, or founder, who establishes a strong culture for the organisation which is a big attraction to investors. But the concern is that as the company grows, that figure – owner/founder/shareholder – relinquishes some influence. How then to retain the good already established?
Hopefully by instilling cultural tenets that have served the company well up to now, “tone from the top” and influencing the behaviour of management and staff, can be maintained.
A board should define the purpose of the company and what type of behaviours it wishes to promote. This involves asking questions and making choices: how to achieve the correct balance between constructive innovation and disproportionate risk-taking; how to integrate new leaders into the company culture, particularly at times of merger or acquisition; how to maintain culture under pressure; whether different parts of the business should operate different cultures; and how to encourage constructive discussion and transparency among its management and staff.
The board needs to be seen to live the values it espouses and to be very clear about any practices for which there is zero tolerance.
Even the perception never mind the reality of poor ethics and leadership can affect consumers and negatively impact investor confidence, something that smaller companies, looking to grow, can ill afford.
During 2015 the FRC will continue its market-led work to assess how effective companies are at establishing company culture and practices and embedding good corporate behaviour. We will consider whether there is a need to promote best practice and report back in the autumn on our findings.
Once good culture is in place, however, the ongoing success of the company and its culture are rooted in succession planning, which is particularly important for smaller companies as they are growing and gaining momentum.
For companies in their nascence, succession planning may not seem immediate, but as their business grows boards should think about the needs of the company in 3…5…even 10 years’ time.
Boards in thinking about their business strategy and expansion plans should give thought to the balance of skills, background and experience they will need from senior executives and even their non-executive directors.
They should look for people who will help them grow as well as those who can be instrumental once they have grown.
We intend to publish a discussion document on this in the next couple of weeks. It has been developed in the spirit of enquiry as opposed to being a formal consultation and we will ask for advice on what ‘good looks like’.
However, we are not seeking identikit responses – ‘good’ will look different for businesses of different sizes, even in different industries.
We will not necessarily make changes to the Corporate Governance Code but will use the responses we receive to consider whether we can help by perhaps issuing guidance.
Smaller company reporting
But it is not just governance where smaller companies need support. We have found that smaller companies with limited resources have been slow to embrace change in corporate reporting. Many still tell us that investors are not interested in their reporting and consequently ask why they should make the effort.
By contrast, we have consulted investors extensively over the last year and have repeatedly heard the opposite point of view. Investors stress that they are more dependent on the annual report in the smaller company sector because the analyst community does not support this sector to anything like the same extent as it does larger companies.
We will consider how we can stimulate better communication between investors and smaller companies, in a cost-effective way. We published our paper on how this might be done and how smaller companies might be supported – and I stress supported, not chastised – earlier this week.
We will hold a seminar on 9th July on the measures proposed in the report, and I encourage you to attend. In all of what we do, like the QCA, we rely on feedback, advice, and yes, sometimes criticism, from our stakeholders. The wider the feedback we receive – from companies, investors and government – the better.
Smaller companies are often seen as the engines of growth and of job creation in the economy. But if they are to grow they need investment. Our work on governance and reporting by smaller companies shows where you can improve your engagement with investors. We look forward to working with you and your stakeholders to put in place practical, useful measures that enhance investor confidence in governance and reporting and ensure your continued prosperity and growth. You, after all are the future bastions of business in this country.
Thank you for listening.