Comment and Analysis

Lord Strathclyde launches report on Corporate Governance Research
on quoted small and mid cap companies in the EU,
sponsored by the Quoted Companies Alliance

Wednesday 15 th February 2006 saw the launch of the Report which took place at the prestigious London Wall offices of Osborne Clarke, solicitors, and was attended by representatives from the investment community, DTI, FRC, LSE, companies, and Middlenext representing mid caps in France.

Opening speech by Lord Strathclyde, President of the Quoted Companies Alliance -

"I am delighted to be here for the launch of Corporate Governance Research on Small and Mid Cap Companies in the Quoted Sector.

I'd like to start by congratulating Professor John Mellor for his timely report. No one pretends that corporate governance is something many boards find easy to deal with in practice, but I believe that we have gone well beyond the box-ticking mentality of the past.

There is no one-size-fits all approach where small and mid caps are concerned, the sector needs to be liberated from regulation that often has no benefit or purpose. As Professor Mellor has put it 'Codes and regulations must cease to be seen as an end in themselves, but a means to an end' where that end is a flourishing market.

It is a fundamental need of the UK, and indeed EU economy in this time of globalisation to increase cross border flows through integration of the capital markets. We should not fear the new global economy; it is bringing unprecedented opportunity and prosperity; it is liberating and exciting; but we must face up to the new challenges it brings.

There is the challenge of competitiveness: how we attract new investment as travel and technology make it easier for companies to locate anywhere in the world. We must learn from each other; regulation must take into account the differing company structures and characters across EU member states. Corporate Governance must not blindly dictate, it must promote effective dialogue between shareholders, boards, other stakeholders and the small and mid cap sector as a whole.

The burden of legislation in the economic sector is abundant. The Company Law Reform Bill currently working its way through the House of Lords contains 885 clauses; and while it may not set many parliamentary pulses racing, it has a huge influence for good or ill on British industry and commerce.

It is vital that we secure the ongoing research funding to develop a regulatory framework that recognises the particular features that small and mid cap markets need to prosper, and spread across the whole of the European Union. There has long been a gap in corporate governance research focussed on this sector, and I am pleased to announce that this project will go a significant way to closing that gap.

This Research sets out the opportunities and the codes that smaller quoted companies need to thrive. We all recognise that we cannot stand still if the UK marketplace is to be the vibrant place we all want it to be.

I must thank Professor John Mellor for the enormous amount of hard work he has put into this report, and his call for 'a vision of a thriving and competitive small and mid cap sector of the economy' is more timely now than ever before.

The QCA share that vision and they must be praised for their continuous support of such research and the unwavering practical encouragement and advice they give to smaller quoted companies.

Stability, fiscal responsibility and competitiveness must all come together if we are to increase prosperity in the British Economy, and I welcome this research as a vital step along that path."

Speech by John Pierce, Chief Executive of the Quoted Companies Alliance and Chairman of the Union of Issuers Quoted in Europe -

"It is 14 years since the Cadbury report was published, and established itself as the cornerstone of corporate governance thinking and practice, not just in the UK but worldwide.

In terms of the history of the joint stock company in the UK, which can be traced back some 300 years or so, it is a very short time span.

I do find it interesting that it has taken so long to get to where we are in developing a workable, balanced and effective link between the owners of capital and the managers of that capital. And the process is still evolving - especially in refining a governance regime that is suited to those smaller, growing quoted companies as they develop from owner managed businesses to fully fledged public companies with diverse shareholdings.

In describing them as developing companies, I immediately introduce one of the challenges of governance - how to accommodate and reflect that growth within the governance code. We talk in a general sense of the need to ensure that governance per se is kept under review, so that it is dynamic and reflects the changing requirements of investors and market practices over time.

But it also has to be dynamic in another sense, at the micro level, and that is what this research has borne out. To date there has been anecdotal evidence, but now we have real evidence that different ownership structures bring different governance challenges calling for perhaps different or flexible or tailored solutions than may not be explicit in the combined code. By no means am I suggesting that the combined code has got it wrong, it is sometimes a consequence of the principles being dissected and perhaps misunderstood or applied too rigidly.

By the researchers for this project talking to both investors and company managements we believe the findings in this report fairly reflect the problem and uncertainties being met by both parties at the present time.

The QCA exists, amongst other things, to find for smaller quoted companies proportionate, workable solutions to market issues. Part of the next step in this research programme is to find out more about how to improve the dialogue between investors and company boards, so that both parties benefit.

The evidence of dissatisfaction on both sides, easily leads to the governance processes being seen as 'imposed chores' rather than part of value enhancement.

In the future study we will explore further the relationship between the cost of capital and corporate governance. Market studies of large companies here and in the US, indicate that investors will indeed pay a premium for shares in a company with demonstrable good governance practices compared with similar businesses which lack such frameworks.

In theory, given the generalised risk profile of smaller companies, a good governance profile may encourage a comparatively higher premium.

If a link is established between the cost of capital and the governance regime in place, then we should see an acceleration toward compliance and best practice amongst small caps. A win win situation for companies, their owners, and the economy at large.

In order to find solutions for a Pan European market we need to share experience with the quoted companies and their representatives in other EU member states, and I am especially pleased that Evelyne Deloirie of Middlenext the French organisation for small and mid caps is able to be here with us this evening.

As you will see from the report, research was carried out with companies in France and Germany, and in the next phase, we intend to extend the work to other major EU countries. The purpose is to make a meaningful contribution to the development and harmonisation of corporate governance principles across Europe. In my current capacity as chairman of UNIQUE - the Union of Issuers Quoted in Europe - a coalition of representative bodies covering 3500 out of the 8000 companies in the EU - I am giving this initiative my full support.

I hope you too will support this important programme of work.

Thank you."

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Research Executive Summary

"Corporate governance codes and the regulation of small and mid caps should be driven by a vision of a thriving and competitive small and mid cap sector of the economy. This vision should determine the objectives for code and regulatory developments. Codes and regulations are not an end in themselves but a means to an end."

Professor John Mellor, author of the report

This research has been carried out on a sample of small and mid cap quoted companies and investigates their relationship with institutional investors in the UK. It is supplemented by preliminary work in France and Germany.

[For full text . ]

NB: Copies of the full Report are available on request

January 2007

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