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Investment trusts have been advised to enhance the diversity and succession planning of their boards, as well as improve shareholder engagement. This comes after the chair of the largest trust in the UK stepped down due to a debate about her tenure length months ago.
A report by Quilter Cheviot reveals that some equity investment trust boards are not meeting targets for ethnic and gender diversity, displaying insufficient levels of engagement with shareholders, and failing to adhere to corporate governance rules regarding director tenure. The investment manager surveyed 41 trusts and described their levels of corporate governance as a “mixed bag,” cautioning that this could impact their market value. The UK has almost 400 closed-ended investment trusts.
Gemma Woodward, head of responsible investment at Quilter Cheviot, remarked that boards run the risk of becoming too “cosy and clublike.” She called for a shakeup in the pool of non-executive directors on trust boards. Woodward also expressed her disappointment with investment trusts for not reaching diversity targets despite emphasizing the importance of cognitive diversity. She suggested that they consider younger generations for board appointments.
While investment trust boards have achieved the 40% target for female representation set by the UK government-backed FTSE Women Leaders framework, data is not collected on boards’ adherence to ethnic diversity recommendations outlined in the Parker review.
Quilter Cheviot highlighted that while most boards are open to constructive challenge and discussion, some are not. One chair even dismissed shareholder engagement as “fatuous.” Some boards rarely engage with shareholders, with one chair admitting to not meeting a shareholder in seven years. However, the report acknowledges that shareholders also have a responsibility to engage with boards.
The asset manager noted that the tools used to assess whether a non-executive director serves on too many boards are inadequate, demanding more informed evaluations. Earlier this year, corporate governance concerns led to a boardroom dispute resulting in the departure of the chair of the FTSE-listed Scottish Mortgage Investment Trust.
Amar Bhidé, who previously served as a non-executive director of Scottish Mortgage, criticized governance practices, including the extended tenure of chair Fiona McBain. The UK corporate governance code recommends that board chairs should have a nine-year limit.
Recently, investment trusts have faced challenges due to poor performance and increasing competition from more affordable passive funds, leading to consolidation within the sector as managers attempt to reduce costs. According to analysts at Stifel, 38% of investment trusts were trading at a discount to their net asset value in early August. Richard Stone, CEO of the Association of Investment Companies, emphasized that trust boards play a crucial role in protecting shareholders’ interests but acknowledged that there is room for improvement.
Additionally, the Quilter report argues that bigger does not always mean better in terms of governance. It suggests that investment trusts with a market capitalization exceeding £2bn tend to score lower in terms of board competition and effectiveness.
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