Disclosure of Governance Information by Small and Medium-Sized Companies

Abstract

Purpose: This paper examines the extent of compliance with the governance regulatory requirements by small and medium-sized companies (SMEs) listed on the Alternative Investment Market (AIM). Considering the declining investor interest in AIM-listed companies coupled with the increasing attention investors pay to the presence of a sound and transparent governance mechanism, the paper seeks to identify those corporate governance and firm structure-specific characteristics that are positively associated with and affect the extent of compliance with the governance regulatory requirements, in an attempt to present recommendations that would make AIM-listed companies more attractive as investment opportunities. Design/Methodology/Approach: The paper focuses on AIM-listed companies over a period of three years (2002, 2003 and 2004) and concentrates on their extent of compliance with the corporate governance disclosure guidelines set out by the regulatory bodies. To measure the extent of disclosure, we compiled a checklist based on the Combined Code (2003) and FSA listing rules. Having reviewed the literature on large companies (as there were no studies on SMEs), we selected a number of governance and firm structure-specific characteristics. The relationships between the level of governance disclosure and the chosen characteristics were examined in order to highlight those factors that are associated with and affect the level of governance disclosure. Findings: On average about 50% of governance items required to be disclosed had been reported by AIM-listed companies. As for large companies, there is a positive relationship between the number of non-executive directors in governance mechanisms and the extent of disclosure. Unlike large companies, firm structure-specific characteristics were neither associated with nor had any impact on the extent of governance disclosure. Considering that there has been a declining interest in AIM-listed companies, we recommend the presence of more non-executive directors as this would ultimately mean more compliance with the governance disclosure requirements and could result in restored investor interest and confidence. Our findings also indicate that SMEs are more likely to have adopted a stakeholder approach when concentrating on their governance arrangements. Originality/Value: This is the first study to present evidence on the state of compliance with the governance regulatory requirements by AIM-listed companies. The study presents evidence on governance disclosure practices of SMEs and indicates that in spite of a less stringent regulatory regime set up within AIM, non-executive directors, who bring in an element of independence to boards, play a significant role in elevating corporate transparency.