In their 1965 musical ‘The Sound of Music’, Rogers & Hammerstein have the Nuns of Nonnberg Abbey sing of their exasperation at the young novice Maria’s free-wheeling spirit and lack of seriousness. It is something that can also be applied to investing on the Alternative Investment Market (AIM). Designed to be flexible and a place where smaller companies can access capital, it also aims to be less burdensome when it comes to rules and regulations, with ‘light-touch’ corporate governance built into its structure. Whilst these generally lower standards of governance are well understood by investors, the speculative nature of the market can heighten risk and provide poor accountability and transparency. AIM is essentially a ‘self-regulated’ market where ‘nomads’ (nominated advisors) are tasked with keeping companies broadly on the straight and narrow.

Risk is compounded to a degree by there being more than one variant of corporate governance for the AIM market. Whilst companies are required to adopt a corporate governance code, there are several competing ones! The QCA (Quoted Company Alliance) Code is by far the most regularly adopted framework, but it is by no means the only one; some larger AIM listed companies have adopted the full UK Corporate Governance Code for instance (sometimes called the FRC Code), where market best practice is fully enshrined on the premium market, and which we welcome. Whilst at EdenTree we recognise AIM serves its purpose of being an agile facilitator of capital for smaller companies, we have been concerned that what constitutes fundamental principles of good governance should, if possible, still prevail.

Since 2019, we have targeted all of our AIM listed holdings (mostly held in the Responsible & Sustainable UK Opportunities Fund) with a view to our encouraging improved standards of corporate governance by making two asks: Annual election of directors and putting executive remuneration to an annual advisory vote. We chose these two areas as being the most desirable in that they would improve transparency and accountability. Typically directors at AIM companies are required to ‘retire by rotation’ – in some years this may mean just one or even no directors will offer themselves for election by shareholders. Similarly, an annual advisory vote on executive remuneration has become a standard of best practice in the UK which we fully support. We believed both asks to be doable without adding financial or administrative burden but with a strong, positive upside.

The conversations we have had with our target companies have been illuminating: Most stated that investors had never raised these requests before, suggesting there is little evidence of basic stewardship being exercised when it comes to the Alternative Investment Market; at others we appeared to be knocking at an open door. In short, we have been delighted by the response to our engagement in which the majority of the holdings targeted - 10 out of 14 or 72% - agreed to move to annual director elections. Two of the targets declined and two failed to respond. Remuneration was more frequently put to shareholder vote among our universe of holdings, but of those targeted, three agreed to introduce a ‘say on pay’ vote from the seven that responded.

Whilst the majority of AIM listed companies continue to subscribe to the QCA Code, our engagement has led necessarily to more of a hybrid emerging in governance, in which these two aspects of the main UK Code have been adopted by AIM listed companies. We fully accept that the UK Corporate Code does not apply to AIM, however we strenuously believe that elements of that Code should be thought of as fundamental to all listed companies, whether large or small. Our investee AIM companies appear to agree with us!

The views contained herein are not to be taken as advice or recommendation to buy or sell any investment or interest. The value of an investment and the income from it can fall as well as rise, you may not get back the amount originally invested. Past performance should not be seen as a guide to future performance. EdenTree is authorised and regulated by the Financial Conduct Authority and is a member of the Investment Association. Firm Reference Number 527473.