What Drives Quality Governance In The Alternative Investment Market?

The question of what constitutes the most effective board composition continues to prompt meaningful debate across UK plc.  

The UK Corporate Governance Code is viewed by some as the benchmark for governance, while others argue it has become increasingly prescriptive, limiting the intended flexibility of the ‘comply or explain’ model. The QCA Corporate Governance Code takes a more principles-led, proportionate approach designed specifically for growth companies, but many believe this flexibility is increasingly under pressure. 

All AIM-listed companies must apply a recognised corporate governance code. Currently, 93% report using the QCA Code, although only 66% state they comply fully with the recommendations. Of the remaining AIM businesses - predominantly the largest 100 companies - many report adherence to the UK Corporate Governance Code, i.e. ‘main market governance’. 

This divergence raises key questions about framework choice, how each influences board culture and behaviours, and which best supports overall board effectiveness. 

To explore, we interviewed 22 FTSE AIM Chairs, many with experience operating under both codes, offering a valuable comparative insight into their respective strengths and limitations. 

Chairs were unanimous on a timeless truth: quality people drive quality governance. Frameworks matter, but true board effectiveness depends on the calibre, mindset and chemistry of board members. 

How Do Companies Choose Between the Two Codes? 

The Investor Mix 

Chairs consistently highlighted investor expectations as a primary determinant of which governance framework to adopt. Many observed that investors often lack a nuanced understanding of governance distinctions within AIM, leading to a default assumption that applying main market governance is the safer option to avoid shareholder dissent.  

Others described it as a deliberate strategic choice - either to attract larger institutional investors or to prepare for a future transition to the main market, particularly given current liquidity constraints in AIM.  

As one Chair put it: “Given the weakness of AIM, we keep our eye firmly on the 250. We want to be ready for it.” 

Several Chairs noted that the investor base alone can effectively push AIM companies into main market governance practices: “When you are at the top of AIM you are doing main market governance - because the investor list drives this. The fact that you are an AIM business makes very little difference.” 

Others pointed to the risk mitigation effect of main market alignment: “Some institutional investors simply won’t invest in AIM businesses as they are seen as ‘riskier’. Applying the UK Corporate Governance Code can help alleviate some of that perceived risk.” 

Reporting Burden and Governance Costs 

Cost and proportionality were cited as key advantages of the QCA Code. The UK Corporate Governance Code requires substantial additional disclosures, often placing a disproportionate reporting burden on smaller companies. 

As one Chair explained: “If we complied with UK Corporate Governance we would need to hire a Company Secretary and our board papers would be double the size, and frankly I wonder how much of the additional reporting would even be read by our shareholders.” 

Another was more candid: “UK Corporate Governance is death by reporting in my view. Lots of work, with very little reward.” 

How Do the Two Codes Differ? 

Board Succession and Composition Planning 

The UK Corporate Governance Code introduces stricter requirements around independence, tenure, and diversity. While these provisions can promote renewal, many Chairs stressed that the QCA Code’s flexibility allows for more thoughtful sequencing of board change, particularly in smaller organisations. 

Another noted the practical challenges of orchestrating simultaneous executive and non-executive succession: “Leadership stability is critical. If my CEO intends to leave imminently, having NEDs or the Chair stay longer is important.” 

Conversely, several Chairs expressed concern that UK Corporate Governance Code requirements can drive a ‘tick box’ approach: “For main market governance, you start with diversity and independence, and hope that you can get the skills you need. It’s ‘tick box’ first and skills and experience second.” 

Board Culture 

The QCA Code was frequently described as fostering a more entrepreneurial and collaborative dynamic between boards and executive teams. Leaner boards, smaller packs and more fluid communication channels were often cited. 

As Chairs observed: 

• “Lots of FTSE AIM businesses are very small and don’t need a cast of thousands.” 
• “The relationship with the executives in QCA governance tends to be more entrepreneurial. The dynamic is more informal, and I think that promotes stronger collaboration.” 
• “In QCA, the governance fluff simply takes less time which allows us to spend more time talking about strategy and the commercials.” 

However, several Chairs cautioned that flexibility can occasionally be misused: 

• “Some board members in AIM use the QCA flexibility for ill. They stay on the board too long and embed a destructive culture.” 
• “There is more room for governance mavericks in AIM.” 
• “Governance creates a framework to remove the ‘bad eggs’. I would say that QCA allows more opportunity for those individuals to stick around.” 

What Is Common Across Both Codes? 

Chairs unanimously agreed that most significant governance frictions do not arise from the Codes themselves, but from the external ecosystem that interprets and enforces them. They voiced frustration with proxy advisors and institutional investors’ governance teams, whose ‘one size fits all’ approach often harms AIM companies. 

Automated scoring models allow little nuance, context, or engagement, issuing recommendations without discussion yet boards bear the reputational and operational cost of addressing them. 

As one Chair summarised: “There isn’t much nuance or helpful opinion.” 

This dynamic is particularly challenging for smaller AIM companies, whose size, growth trajectory, and governance needs differ materially from larger businesses. Chairs warned that without contextual understanding, proxy advisors risk misinterpreting sensible governance decisions as deviations from best practice.  

Another remarked: “They treat the Code like a list of rules. The reality is that board composition and succession planning is complex.” 

Chairs also expressed frustration with fund managers’ internal governance teams when rigid templates are applied that bear little resemblance to the company’s context. They noted a growing disconnect between investment managers and their internal compliance teams who apply governance standards in isolation. 

As one Chair put it bluntly: “The investment manager and their compliance people don’t talk! In fact, they even complain about each other to us!” 

Chairs argued that compliance pressure risks overshadowing long-term strategic judgement, which may push boards to prioritise proxy-driven structures rather than what works best for the business. This was reflected in one Chair’s observation: “The overprescription culture can inadvertently harm the very worthy principles we are trying to uphold.” 

These interviews reveal a persistent tension between governance as a compliance exercise versus a value driver. AIM’s regulatory flexibility lets boards tailor frameworks to their needs, but this freedom is increasingly threatened by external forces. In response, the London Stock Exchange’s 2025 AIM reports outline reforms to strengthen AIM’s identity as a growth-focused market while easing regulatory burdens. Several measures are already in place, with proxy advisor influence slated for deeper review in 2026. These initiatives underscore AIM’s commitment to remain competitive, differentiated, and positioned for growth. 

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