AIM company scorecard
A RATING SYSTEM FOR SMALL CAP COMPANIES SUCH AS THOSE ON AIM
ShareSoc has been concerned with the quality of companies on AIM for a long time (the issues were covered in our March 2012 and September 2012 newsletters). It is difficult for investors to tell good companies from bad, particularly in the AIM market which is full of dross. ShareSoc has invented a simple way for you to differentiate between good and bad. It’s a “scorecard” that anyone can use to rate companies, with a particular focus on the point of view of individual investors.
Private investors often get sucked into investing in companies with poor corporate governance, poor basic infrastructure, no track record, and with incompetent or untrustworthy directors. New AIM IPOs are particularly problematic with companies frequently failing or subsequently delisting. But how can investors sort the wheat from the chaff?
ShareSoc has devised this simple tool to help investors differentiate between good companies and those that are more questionable. It is a check list of 47 questions of readily available information and aims to summarise in a single score various aspects of how shareholder friendly the company is, the corporate governance, director remuneration policies, legal and regulatory problems and other aspects that investors might need to examine.
But it is not a black and white rating system – it only provides a relative quality score and no AIM company is likely to tick all the boxes. It’s the boxes that are not ticked that the investor needs to consider and judge whether that is of concern (although ShareSoc suggests that the items being scored are all important).
Note that the system is not designed to give buy or sell recommendations on companies and is not a substitute for full financial analysis and other due diligence that investors should perform before they invest in a company. But it’s interesting to mention the scores that resulted when we rated two companies which ShareSoc has commented on in the past in November 2012. These are Intercede (which ShareSoc had criticised for its pay arrangements, lack of a Non-Executive Chairman and shortage of independent Non-Executive directors) and Lo-Q (now known as Accesso) which is a popular AIM company among private investors. At the time of producing this note, Intercede scored positive ticks on 53% of questions and Lo-Q scored 85% – clearly a major differentiation. We will not be disclosing the details of the scoring because some of the answers are subjective and may vary over time – this is not a recommendation to buy or sell the shares in those companies. We suggest potential investors should examine carefully any company that scores less than 75%, but you should probably consider any questions where ticks are not given. For example, Lo-Q is clearly less than perfect in the remuneration area (no Remuneration Resolution on the last AGM agenda for example) so if that is of concern to you then take note of it in your judgement of whether to invest in a company.
A brief description of what is covered
It’s worthwhile explaining the main categories of questions because otherwise it may not be obvious why they have been included in the scorecard. These are:
- Shareholder Friendly. This section simply tries to identify whether companies, and their directors, adopt a positive attitude to individual shareholders, and give you the opportunity to learn more about their company and its management.
- Shareholder Control. It is good to have directors interests aligned with other shareholders by them holding enough shares to have a significant financial interest in the success of the company. But having too many shares puts them in a dictatorial position.
- Corporate Governance. These questions confirm whether the company adheres to normal public company corporate governance standards and in particular have truly independent non-executive directors dominating the board rather than executives.
AIM listed companies should not be run as if they are private businesses by founders, major shareholders or a clique of executives because they are likely to act in their interests rather than your own. Independent non-executives, including a Chairman, are the only people who can protect the interests of minority shareholders.
- Remuneration. Remuneration of directors should be reasonable for the size and profitability of the company and be subject to shareholder approval. Excessive remuneration, particularly very aggressive bonus schemes, encourages risky behaviour and in small companies can divert profits away from investors to directors. The performance of companies is inversely correlated with the pay of directors so base pay should be only a fair market wage for the job being done. Out-performance that generates good profits should be reflected in the increased value of their own shareholdings or dividends paid so that Directors interests are aligned with shareholders.
- Company Registration. Companies whose legal base is overseas may not be subject to the Takeover Panel Code (an important protection for minority shareholders), and can often create legal difficulties when wrong-doing needs to be pursued.
- AGM Procedures. How the company treats shareholders at General Meetings is an important sign as to their general attitude to investors (and particularly individual shareholders who are the main people who attend AGMs at present). The details of the resolutions on the agendas for such meetings are also important to understand the directors’ attitudes to corporate governance and other matters. Not all investors have the time to attend AGMs but ShareSoc publishes a number of reports on them and if you can get someone to attend and write a report so much the better (ShareSoc offers a prize for good reports).
- Share Dilution. Share dilution is of major concern to private investors in AIM companies now that rights issues are rare, and placings all too common.
- Legal, Regulatory Compliance and Contractual Issues. These questions simply review the legal and regulatory issues associated with the company. They are a measure of how “clean” the company is and whether they have had problems in the past.
- Business Profitability. These are just a few simple questions on financial status, i.e. a basic sieve looking for obvious problems that might tend to rule them out as an investment proposition.
- Marketing and PR Competence. All companies have to market their goods and services if they are to be successful and this is usually on public display so shareholders can easily review their operations in this area. Also if you cannot understand what a company does, can anyone else?
- Share Liquidity. An illiquid market for a stock, which will also typically mean it has a high spread, will tend to make buying/selling shares both difficult and expensive. It will also put off other potential investors.
- Trust and Track Record. With any listed company, but particularly so with small AIM companies, knowing that your directors have demonstrated past competence and that you can trust them to act in your interests are two very important requisites.
Some judgement on these matters might be required, but the answers to the questions above might give you some hints. Obviously researching the history of a company and of the directors can help, as can meeting the directors.
Click on the link at the top right of this page to open the AIM Scorecard as a PDF document.