Is a tougher code required?

Sir Derek Higgs believes that AIM companies and private equity backed
businesses should be subject to tougher corporate governance rules.

Let’s examine this notion for a moment. The suppositions on which his
pronouncement is based are first, that AIM companies do not comply with the
combined code and second, that investors in private equity backed businesses
should enjoy a higher level of protection than those investing in other private

But hang on a minute. Fully listed companies are not straitjacketed into
complying with the code. They comply with it in as much as it is appropriate and
relevant to their business. But if they choose not to abide by any particular
aspect of the code, they have the freedom to explain why they have chosen not
to. It is up to the company board to weigh up the degree of compliance with the
code which best fits its investors’ profiles and expectations. If investors
don’t like it, they can take their money elsewhere.

In much the same way, AIM companies usually comply with the code, where
appropriate, as a matter of best practice. For AIM companies that wish to
attract more sophisticated investors, it would be unwise not to do as their
fully listed cousins do, but for the vast majority of smaller businesses, it
would be wholly inappropriate.

Turning to private equity backed businesses, what would the imposition of the
code actually achieve? The code is there to inform prospective investors of the
extent to which a company has chosen to comply with best practice in relation to
corporate governance. This presupposes that investors are actively involved in
some examination of the company.

To say AIM companies should be made subject to the code or a light version of
it misrepresents how fully listed companies currently put into practice the
provisions of the code and marginalises what many existing AIM companies do

So who would enforce compliance? None other than the community likely to
benefit most from the imposition of the code – the private equity industry.
Surely this is folly? To think that the private equity community would argue
that investee businesses should comply with a light version of the code would be
like, well, England voting for penalties.

John Cowie is head of AIM at Smith & Williamson

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