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Share prices of AIM companies adopting the Corporate Governance Code soar

Share prices of AIM companies adopting the Corporate Governance Code soar

*Companies that make greater use of non-executives clearly outperform says Edward Drummond

AIM listed companies that follow the UK Corporate Governance Code and make more use of Non-Executive Directors (NEDs) perform far better than those that do not, according to research by Edward Drummond, the leading executive search firm.

Edward Drummond says that FTSE AIM 100 companies that had a majority of NEDs on their board saw their share price increase by an average of 22.3% per annum (over the last three years) versus just 17% per annum for companies that have a majority of executive directors on their board.

Similarly AIM 100 companies that hired a separate non-executive NED saw their shares increase by an average of 21% per annum (over the last three years) whereas companies that did not employ a separate non-executive chairman only saw their share price increase by an average of 12% per annum.

Edward Drummond says that this confirms their own experience that AIM and other small and medium sized companies that overcame initial scepticism over the use of NEDs have found that they can add huge value if used properly. 

Neill Fry, Director at Edward Drummond comments: “These figures suggest that following the aspects of the Code that address board composition should be a priority for companies. The additional level of insight and experience that is brought by having a significant NED presence seems to be having a substantial impact on share price.” 

“It is certainly food for thought for those companies that feel investing in corporate governance is not a priority for rapidly growing companies.” 

Neill Fry explains: “Having additional directors with substantial business experience come in and look at a company from a new perspective is invaluable. NEDs can spot gaps in a company’s thinking and suggest alternative approaches. That can be invaluable to a company which might otherwise take a too narrow approach based on what worked for it in the past rather than what it needs to do in the future.”

Edward Drummond points out that whilst companies with a full Main Market listing must either follow the Corporate Governance Code or give reasons as to why they do not conform to each requirement, companies listed on AIM are not obliged to follow the Code at all.

Neill Fry adds: “The guidelines in the Corporate Governance Code are merely voluntary for AIM companies. Given that making significant use of NEDs seems to be having a positive measurable impact on a company’s performance, the London Stock Exchange and investors may wish to consider what they can do to encourage more AIM companies to adopt some of the key elements of the Code.”

Edward Drummond explains that AIM companies often recruit NEDs with a view to them taking on a more hands-on approach to help to boost growth.

Neill Fry comments: “In general, companies listed on the Main Market hire NEDs with a huge emphasis on their role in overseeing the compliance side of a company’s corporate governance. Since AIM listed companies are not required to do this, they hope to use NEDs to get much more involved in the day-to-day operations as well as providing oversight.”

Edward Drummond says that sometimes NEDs are brought in to a company having come from beyond its immediate industry or from an equivalent business that is far larger. The main benefits that NEDs bring include:

&middot         Substantial business acumen and experience developed over many years

&middot         A willingness to help develop the Directors plans for growth rather than just challenge it

&middot         First hand experience of how to deal with the “growing pains” that an AIM company might encounter

&middot         Ability to draw on an extensive network of business connections

&middot         Can take on a mentor role to Executive Directors 

Neill Fry comments: “It’s important for AIM companies to make use of the flexibility they have in how they use their NEDs.”

“Having a separate chairman and CEO and having a strong NED presence is desirable, but that doesn’t’ mean mimicking a FTSE 100 board exactly. The main concern for an AIM company is to maximise growth opportunities and increase profits and investors will support NEDs whichever way best achieves that.”

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