Although the Alternative Investment Market (AIM) is a public one, its relatively relaxed regulations and its application of the ‘comply-or-explain’ rule mean that the role of the board can be very different to that of companies on, for example, the main list.
The old adage states that “the chief executive runs the company and the chairman runs the board.” This is also true for AIM companies, but, owing to the nature of organisations listed on this market (typically small, growing companies), the chairman is likely to be more involved in the operational side of the company than his/her counterparts on the main list.
“AIM companies invariably have smaller boards [than most companies on the main list] and, hence, their directors are much closer to the business: what goes on, issues, operations, etc. In smaller companies, the board will become involved with actions that they would not be able to concern themselves with in larger firms. This has advantages in that one can see that one’s decisions are having a direct impact. The chairman in a smaller company is going to be much more closely involved in helping the CEO run the business and that can be a lot more fun,” says Paul Clarke, Associate at Criticaleye and Non-executive Director of Brookwell.
Complying with the Code
Neil Matthews, Partner & Head of Equity Capital Markets at Eversheds, comments that, although AIM-listed firms are not required to adhere to the UK Corporate Governance Code, in relation to board composition, they should comply in the name of governance. Having this framework in place can make it easier to move up to the main list if that becomes an option.
“Any AIM company would be well advised to follow the corporate governance code,” says Neil. “Some will become ‘super’ compliant, but it is advised at least to have the minimum amount. This almost certainly means having a separate CEO and chairman.” By following the code, organisations are demonstrating they are comfortable with corporate governance and that they have strong non-executives.
Created to allow smaller companies to float shares with a more flexible regulatory framework than is applicable on the main market, AIM has no requirements for capitalisation or number of shares issued. Based on the ‘comply-or-explain’ option, AIM allows companies to comply with its rules or explain why they will not comply. In return for granting this leeway, the Exchange requires continuous oversight and advice by the issuer’s underwriter – the NOMAD.
“The role of the NOMAD is central to AIM’s regulatory model, as these brokers play the role of gatekeepers, advisors and regulators of AIM companies. In advising each firm as to which rules should be complied with and the manner in which existing requirements should be met, NOMADs provide the essential service allowing firms to abide by specific regulations, reducing regulatory costs in the process. Clearly, the chairman should have a close working relationship with the NOMAD,” says David Pearson, a Criticaleye Associate and former Chairman of Vividas Group plc, a one-time AIM-listed company.
One of the major differences between main-list chairmen and their AIM-listed counterparts is that, due to the nature of AIM investors, the chairman may have to become an advocate with major shareholders.
Conventional thinkers believe that the CEO and finance director should be the only directors that deal with investors, as institutions usually want to talk to the people who run the business. However, it is considered best governance practice for the chairman to meet one-on-one with key shareholders, mostly institutional investors. “That is very good because I can talk about the company away from the chief executive and finance director. It gives investors a view of what we’re up to, where I see the company going and how that all ties back,” says John Brackenbury, Criticaleye Associate and Founder and Chairman of Avanti Communications plc.
Paul says, “Where the shares are illiquid and investors cannot exit, then the chair may well be contacted by the investor if attempts to deal with the CEO have not been successful.”
Conversely, there are those that believe that the investors should be dealt with exclusively by the board, arguing that the management team should be concerned with running the organisation, not courting investors.
Another key part of the chairman’s role is in the succession planning of the leadership team.
“For example,” says John, “Every July I have a meeting with the chief executive because, if he was run over by a bus or our technical director was run over by a bus or our finance director was run over by a bus, you’ve got to have plans in place. This is particularly important relating to knowing who is coming up through the ranks so that, in the event that we need to replace someone quickly, we know if we will need to go outside, or deal with it internally. I actually do sit down and review that annually.” The chair also has to consider the succession plans for his/her own position.
What makes a good chairman?
A successful chair of an AIM-listed company will understand the business, be able to mentor high-level executives and have a good grasp of corporate governance regulations and guidelines.
“A good chairman is someone who is experienced in a public company, is a good listener and is available to the CEO at any time. He/she should respect that he/she does not run the company but can give good advice in a fashion that can influence the CEO without taking over and running the business,” says Paul.
“A chair also has to be able to summarise discussions, round up the dissenting opinion so that all agree a course of action, bring up issues that need to be discussed, not panic or react to a problem as a CEO might and remember that he/she does not run the company. Lastly, the chairman will not know everything so it is helpful that they have a good network of contacts,” he continues.
It is imperative that the chairman keeps the board looking at the medium- to long-term, rather than just the day-to-day operations. “In a well-run AIM-listed company, the chairman can help to ensure that sufficient board time is allocated to strategic and medium/long-term issues when the temptation is often to get sucked into urgent matters,” says Andy Morrison, former CEO, Xtract Energy plc.
The CEO perspective
The most important element of a chairman’s role, aside from running the board, is the relationship he/she has with the CEO. This partnership is vital to a smooth running organisation.
“Following the retirement from the board of our previous chairman, I recently had the task of recruiting a new candidate for the role,” says Stuart Green, CEO, ZOO Digital Group plc. “From a City perspective, it is important for the chairman to be credible as an ambassador for the company, with a good track record with other quoted companies, strong in corporate governance and seen to be independent. From a business perspective, we wanted someone with the capability to understand our proposition and the market. And from a personal perspective, I wanted someone who would work closely with me and provide support and guidance to help me and the business to grow. It would be easy for an established CEO to see an incoming chairman as a potential threat, and I know that some CEOs are really only looking for someone to turn up to meetings once a month and provide the rubber stamp. But AIM is for small companies that need all the help they can get to grow and be successful, and I think it is vital to capitalise on the contribution of a good chairman. Having the right credentials is obviously important for the role, but good chemistry is the secret sauce for an effective and productive chairman/CEO relationship. I’m pleased to say that we found the right guy for ZOO!”
Tips to aspiring chairmen
It may seem like a natural progression to move from CEO to chairman, however, it is not a sweeping generalisation to say that ex-CEOs don’t always take well to playing second fiddle to the CEO. “There is no guarantee that a successful CEO can become a successful chairman, as the requirements of the roles are very different,” says David Pearson.
Chairmen have to remember that they don’t run the business. Paul says, “You are there as a good counsel and advisor. As a good chairman, you are there to influence and bring together all the views and, in extremis, you are the man in the chair seat and may have to take the difficult decisions, such as removing the CEO. The chairman has to lead that sort of action.”
David recommends taking some training in governance, familiarising yourself with the listing rules and spending time with a NOMAD discussing what a successful AIM company looks like. “Do your due diligence duly and diligently,” he says.
The Role of an AIM-listed chairman
• Run the board
• Be involved in choosing a NOMAD
• Succession planning
• Deal with major investors/shareholders
• Hire and fire the CEO
• Be a sounding board and counsel to the CEO
Please get in touch if you have any comments about the issues in today's update.
I hope to see you soon,