NEWS
AIM faces challenges but has an important continuing role to play as the economy recovers
October 22, 2024
You may have formed the view from recent headlines that AIM is in its final death throes. Speculation about possible Budget tax changes is unhelpful and, to cap it all, LSEG data shows that whilst the FTSE All Share has risen 21% over the last three years, the AIM index has fallen by 40%!
That said, recent Peel Hunt data reveals that there are more than 600 companies on AIM, having an aggregate market capitalisation of £68bn. By comparison, there are 110 companies (excluding investment trusts) in the FTSE Small Cap, having an aggregate market capitalisation of only £29bn. Since 1995, when AIM was launched to help small, high-growth companies raise capital for expansion, £130bn has been raised. The data indicates that AIM continues to fulfil its objective of providing a supportive environment for growing early-stage companies.
There is no doubt, however, that AIM faces challenges. We advise a wide range of AIM clients who increasingly comment about difficulties raising capital, low valuations, poor liquidity, excessive corporate governance and high listing costs in our discussions with them.
At least the challenges are known and arise from the way our financial markets work, so it should not be beyond the bounds of human intelligence to identify workable solutions. The overarching challenge is similar to that facing the UK’s main market – how to ensure it is and remains an attractive place for companies to list their shares and raise capital. Much has been written but for a clear indicator of potential courses of action to address AIM’s challenges see, for example: AIMing higher – Article – Peel Hunt. Of course, the range of available solutions may be either restricted or broadened by the imminent Budget.
Some believe that higher levels of executive pay are the answer (or at least a key component of the answer) to improving the UK’s competitiveness. Our view is that greater freedom and flexibility about the structure of pay is more important.
Our September Newsletter included an article about our observation that executive pay structures have become standardised and, therefore, detached from the principle that they should support the specific characteristics, culture and strategy of individual firms. The article pointed to evidence that the homogenous nature of executive pay owes much to the approach of investors and proxy agents to corporate governance guidance and has resulted in depressed valuations and shareholder returns. Read the article here.
In 2025, companies that have adopted the Quoted Companies Alliance Corporate Governance Code, principally AIM companies, will be expected to make remuneration disclosures under Principle 9 of the QCA Code, which came into effect for financial years starting on or after 1 April 2024. Information about the impact of Principle 9 can be found here.
Whilst adding to the burden of compliance, the QCA Code provides a more flexible and less prescriptive governance framework than the UK Corporate Governance Code. That said, early-stage growth companies are unlikely to have the in-house resources to address increased compliance requirements
Investment Association Principles of Remuneration published in October 2024 and about which much has been written elsewhere, contain welcome relaxations designed to help remuneration committees structure tailored executive remuneration packages. They emphasise that the Principles are guidance, not a rigid set of rules. So, there are signs, potentially, of a trend towards a lighter touch from the regulators.
However, whilst corporate governance codes for issuers recognise they are guidance (not rules) and emphasise the importance of ‘comply or explain’ and shareholder engagement, they do not apply to investors or their proxy agents. We hope the review of the Stewardship Code that will follow interim changes announced in July 2024 will help to square the circle. The review process is in train but there will be a period of public consultation before a new Code emerges.
Regarding engagement, the IA Principles contain this statement: “We recognise that this inclusive approach [to engagement] needs to be reciprocated by shareholders to create a constructive exchange of ideas.” On the other hand, the FRC has reminded asset owners and managers signing up to the Stewardship Code that, whilst engagement is useful, they do not need to undertake collaborative engagement unless it is necessary, i.e., conducive to achieving their stewardship objectives.
In an environment where investors are more likely to reject remuneration proposals that do not tick all or most boxes in the relevant governance code, remuneration committees, particularly those of early-stage growth companies, are less likely to feel confident about designing tailored executive remuneration structures and advance-testing them with investors.
Of course, many asset owners and managers do engage with remuneration committees. But sometimes, the process might fail because compliance and investment teams are not aligned. That situation is less likely to occur if investment teams include appropriately experienced compliance professionals. In our view, closer alignment between investment and compliance teams would benefit all companies, especially early-stage growth companies on AIM.
AIM companies are required to appoint a firm to act as their Nominated Adviser (NOMAD) to advise on admission to AIM, raising capital, acquisitions, LSE rules and corporate governance generally. For two clients recently, we have worked closely with their NOMAD, first to design executive remuneration in connection with a delisting from the main market, a reverse takeover and admission to AIM and, secondly, on management incentives aligned with a new five-year corporate strategy.
AIM faces challenges but has a role to play in a growing UK economy – perhaps alongside the UK’s private equity sector – and a review and overhaul would be welcome. The forthcoming Budget will doubtless influence the future for AIM and the options available to address the challenges AIM faces. Interesting times.
If you would like to discuss anything arising from this article, please contact paul.norris@mm-k.com to discuss any points arising from this article.
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