Reporting burdens and access to auditors are major bugbears for smaller, UK-listed corporates – and may be holding public markets back from their full potential. That’s the assessment of James Ashton, Chief Executive of the Quoted Companies Alliance (QCA).

Interviewed at ICAEW’s recent Corporate Governance Conference in a session on how to make the UK more attractive to invest and do business in, Ashton said that QCA members – mainly AIM- and Aquis-listed companies – have expressed “great concerns” over current regulatory requirements.

“The average length of an annual report for an AIM company is 45,000 words,” Ashton told delegates. “That’s longer than “The Lion, the Witch and the Wardrobe”. If you look at the FTSE 100, you get into “100 Years of Solitude” territory. What is gained from listed companies having to produce a novel every year?”

Speaking to ICAEW Chief Policy and Communications Officer, Iain Wright, Ashton queried inconsistencies in reporting requirements across the entire UK investment landscape. Using Sainsbury’s and Asda to illustrate how those issues affect companies of similar stature, he pointed out that while the former is a registered Public Interest Entity (PIE), the latter is not. So a typical Sainsbury’s annual report runs to 135,000 words, while an Asda equivalent is 75,000. More broadly, Ashton said: “Many small, main-market companies are deemed strategically important – yet many private companies aren’t.”

As such, QCA is calling for the government to reassess the PIE regime in its Audit Reform Bill. “It should be more size-based, rather than capturing so many small companies,” Ashton said.

The safest graveyard?

Ashton noted that for companies at the smaller end of the market, the question of whether to remain listed has become a “margin call”. For example, in the run-up to the conference, Southampton University spinout Synairgen decided to delist on the basis that it would save more than £600,000 in administrative costs by going private. “People may say that’s fine because the company is still based in the UK,” he said. “But as soon as companies like that go private, they’re more likely to seek funding from overseas – which in turn makes them more likely to up sticks altogether.”

As a further example, Ashton highlighted the landmark, Cambridge-based tech company Arm – subject of his 2023 book “The Everything Blueprint”. While Arm’s ownership structure feeds considerable debate over whether the company is still British, it continues to refer to its Cambridge office as its headquarters and employs around 3,500 people there.

“If Arm hadn’t been listed in London for 18 years up to 2016, and if it had needed to look abroad for funding far earlier in its life – probably through private markets – it wouldn’t have anything like that many jobs in Cambridge,” he said. “It’s all about how soon in a company’s life we’re forcing it to uproot and look abroad.”

Asked how reporting requirements could be eased to safeguard the appeal of the UK public listings system, Ashton proposed that firms could be allowed to place on their websites much more corporate data that doesn’t necessarily change on an annual basis. “Another obvious area we’ve looked at is the remuneration report – or what we may call ‘the essay on pay,’” he said. “Companies are writing 15,000 words on the pay deals of three individuals, which seems astonishing.

“So there’s an awful lot that could be stripped out. To quote former City minister Bim Afolami, who’s now on our board, we do risk becoming the safest graveyard.”

At the same time, smaller listed companies are battling issues around audit affordability and availability. In recent research, member companies told QCA that their average annual audit costs exceeded £300,000. Meanwhile, Ashton said: “Our findings showed that a number of companies in segments from which auditors had effectively withdrawn were really struggling to drum up a tender. If your audit process stems from someone ringing round and saying, ‘Please will you tender for my audit,’ that’s not the beginning of a great relationship.”

Backing Britain

On the critical role of backers in nurturing smaller, public companies, Ashton said that the best way to persuade global investors to buy British is for the UK investment community to do the same. With that in mind, he cited the Pensions Investment Review as an important step towards consolidating local government pension schemes in a way that would encourage investors to take on more risk and support smaller, growing companies.

Ashton also highlighted the 2023 Mansion House Compact, a voluntary scheme whereby Direct Contribution providers put 5% of their funds into equities including AIM and Aquis firms – the very types of companies that QCA represents. He said that plans are underway to widen the scheme from its current roster of 11 providers and that there is talk of raising the funding cap to 10% through a combination of mandates and voluntary incentives.

For Ashton, though, one part of the community that could do more is the British Business Bank. “It’s had 10 years of backing small businesses – fantastic,” he said. “But if you’re the UK’s appointed economic development bank, back all growing companies – not just private ones. That’s something we’ve pressed them on and written to the minister about.”

Turning to stewardship within growing, listed companies, Ashton hailed the adoption rate of QCA’s own Corporate Governance Code – developed after the body ceased its advisory role on the UK’s primary Corporate Governance Code in 2013. “We’re proud of the work we’ve done on our code over the past 12 years,” he said. “It’s now observed by 93% of companies on AIM and 75% on Aquis, nearly as many as follow the main code. Directors – particularly of founder-led companies – have told me it’s a very helpful document to put on the table and say to leadership colleagues, ‘We should talk about this.’”

On the performance of the primary code, Ashton added: “We think it needs to give backers more confidence to invest.”