Select Committee on Treasury Appendices to the Minutes of Evidence


Memorandum from the Quoted Companies Alliance



  1.1  The Quoted Companies Alliance (QCA) is a not-for-profit association dedicated to promoting the cause of Smaller Quoted Companies (SQCs)—defined as those quoted companies outside the FTSE 350 representing 85 per cent of UK quoted companies by number, and with market capitalisations up to 400 million.

  1.2  QCA believes that the UK's future prosperity depends on business enterprise and is committed to improving the ability of its members to:

    —  demonstrate value to both capital markets and the wider economy;

    —  to represent members' interests and requirements; and

    —  to ensure that the regulatory environment in which they operate effectively balances the interests of members, investors and other legitimate interests.

  Together SQCs directly employ over two million people and indirectly support the employment of many more.

  1.3  Through our representation and knowledge of aspects of small and medium sized public limited companies (excluding investment trusts) and their markets, we wish to put forward a number of matters for consideration by the Committee.


  2.1  Because of our focus as an organisation we have not endeavoured to cover all aspects of the review which is very wide ranging.

  2.2  We believe it important to conduct this review with the awareness:

    —  that the vast majority of companies are well run in the interests of their shareholders despite the recent high profile business failures; and

    —  of the changes already in the course of preparation—the Company Law Review (DTI), the consultative review of Directors' Remuneration (DTI), the Myners Review (HMT), and various initiatives on corporate governance and accounting standards.

  2.3  We also believe it important to avoid a "knee jerk" reaction to recent events. The issues are very complex and require a considered response in the light of changes already underway, and mentioned above.


  3.1  Our members rely on investors for the capital they need to grow their businesses. This involves a series of relationships based on trust:

    —  Trust in the basic business idea—will it/does it work?

    —  Trust in the management:

      —  will they deliver/can we believe their pronouncements?

      —  are they running the business in the best interests of the shareholders?

      —  can we rely on their published accounts to show the whole financial picture?

  3.2  Some issues rely at the end of the day on the judgement of the investor. But the information feeding that judgment must be as accurate as it is possible to be (difficulties with forecasts, etc) and authenticated by independent assessors.

  3.3  The question of management competence is not, in our view, an issue for regulators. The question of management honesty and transparency is. So is the qualification and independence of the assessors—be they financial auditors, property valuers, consulting actuaries, etc.


  4.1  People must have confidence in the safeguards because without adequate and transparent safeguards people will not invest. This will have serious implications for the growth of the UK economy. We believe the UK is far from reaching this situation, but there are areas where a review may be worthwhile:

    —  the longevity of auditor contracts, rotating partners within firms;

    —  the consolidation of the audit industry;

    —  the loss of audit objectivity where firms also offer consultancy, tax, legal and other services; and

    —  companies must be prepared to pay a sensible/fair price for the audit. The fee is another overhead and companies seek to minimise it. As with any service or product if the price reduces too far, quality will suffer. (This is a difficult area.)


  5.1  The underlying principles of company accounting are, in our view, by and large adequate. It is crucial to maintain a principle led system and keep away from a rule based system (such as in the US). The concept of "true and fair view" should prevent scandals of the Enron type if the auditors do their job properly and not overly rely on "comfort letters" signed by directors of the company. (In this latter connection it is interesting to note the recent court ruling in the Baring Bank case.)


  6.1  The other set of relationships which must be transparent and satisfactory to investors is that between the company's board of directors and the shareholders. This must start from the clear understanding that the shareholders own the company and the directors are accountable to them.

  6.2  The development of corporate governance since Cadbury 10 years ago has improved the situation greatly. However, there is much still to be done, on both sides of the relationship.

  6.3  Shareholders should become more active where warranted. They must act more as the owners they are. This is a difficult area but Paul Myners has published interesting ideas such as a senior independent director being a conduit for shareholder views.

  6.4  A code of conduct for non-executive independent directors including the recruitment of and time availability of said directors. It could also cover their selection (identifying the particular skills or experience the board needs), their objective selection from a wider pool of candidates; detailed job specification, annual appraisal, etc.

  I trust these views will be of assistance in your work. We will be pleased to supplement this submission with oral evidence if the Committee so require.

The Role of the Quoted Companies Alliance (QCA)



  A not-for-profit association funded by its membership, the QCA represents the interests of SQCs, their advisers and investors. It was founded in 1992.

  The QCA has over 300 members. Seventy per cent of these are smaller companies quoted on the stock market, or companies with aspirations to join. Thirty per cent are drawn from the full range of professional advisory firms whose business is either wholly or significantly derived from servicing smaller companies.

  The QCA is governed by an elected Executive Committee, and undertakes its work through a number of highly focussed, multi-disciplinary committees and working groups of members who concentrate on specific areas of concern, in particular:

    —  taxation;

    —  introduction of, or changes to, legislation affecting SQCs;

    —  corporate governance;

    —  share schemes for employees;

    —  trading, settlement and custody of shares;

    —  structure and regulation of stock markets for SQCs; Financial Services Authority (FSA) consultation;

    —  political liaison—briefing and influencing Westminster and Whitehall, the City and Brussels;

    —  accounting standards proposals from the Accounting Standards Board;

    —  company law reform.


  As the only organisation dedicated solely to the particular interests of the SQC sector, the QCA has three primary goals:


  To create a distinct identify for the SQC sector, and demonstrate its value to the stock markets and the economy.


  To pro-actively pursue and represent the interests and requirements of the SQC sector to enable it to increase its contribution and ensure that its specific needs are addressed.


  To build a strong and vocal collective body of support from within the SQC sector, among corporate directors and securities industry leaders.


  The Quoted Companies Alliance definition of Smaller Quoted Companies (SQCs) is:

    —  all fully listed companies—excluding the top 350 ie with market cap of 340 millon+;

    —  plus companies quoted on AIM; and

    —  plus companies quoted OFEX.

  SQCs contribute to the economy:

    —  there are approximately 2,000 SQCs;

    —  they represent around 85 per cent of the total of quoted companies by number;

    —  they employ two million people;

    —  this figure represents around 10 per cent of total private sector employment; and

    —  every 5 per cent growth in the SQC sector could reduce UK unemployment by a further 100,000.

    They generate:

    —  corporation tax paid of 2 billion per annum;

    —  income tax paid of 5 billion per annum; and

    —  social security paid of 2 billion per annum.

  The tax figures exclude business rates, VAT and other indirect taxes.

21 March 2002


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