Investment trust boards urged to improve their governance

In most cases, investment trusts have an independent board of directors. It is the board’s job to act in the best interests of shareholders, including holding fund manager performance to account.

Due to the powers a board has, including the ability to sack a fund firm, this is one of the structural advantages of investment trusts over funds. As our beginner’s guide explains, the other main plus points of investment trusts are a fixed pool of assets, the ability to retain 15% of income generated each year, and the option to gear (borrow to invest).

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However, investment trust boards are in the firing line following research from Quilter Cheviot, a wealth manager.  

The firm met the chairs and other non-executive directors (NEDs) of 41 equity investment trusts. It examined three factors: board composition, board effectiveness and responsible investment disclosures. Each trust was given a green, amber or red rating on those three measures. Most received an amber rating, with three trusts given a green rating and two handed a red rating. The names of the trusts were not revealed.   

Following those meetings, Quilter Cheviot penned a range of recommendations to improve governance. Those recommendations include managing board succession planning on an ongoing basis, rethinking recruitment to reach diversity targets, ensuring personal wealth is not a barrier to being appointed to a board, and focusing responsible investment disclosure on the investment trust rather than the wider fund firm’s approach.

Of the three factors it examined, the wealth manager pointed out that board composition was the category attracting the greatest number of red ratings.

It added: “The most common reason for the red rating for board composition was failure to meet the UK diversity targets, the presence of non-independent directors, or one or more directors serving over the recommended tenure of nine years with no plans to resolve this, indicating a lack of succession planning.”

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Nick Wood, head of investment fund research at Quilter Cheviot, added that as those who have money in investment trusts are shareholders the “governance expectations are much higher than they would be for an open-ended fund”.

He continued: “As such, engagement exercises such as this are crucial to ensure we understand how investments are being managed on behalf of our clients, and crucially provide constructive feedback so we can see improvements over time.”

Responding to the report, Richard Stone, chief executive of the Association of Investment Companies (AIC), said: “Investment trusts’ independent boards of directors are important guardians of shareholders’ interests. Boards have been particularly proactive this year in their pursuit of shareholder value, proposing mergers, reducing fees and even proposing the winding-up of companies.

“Shareholder engagement is a critical component of good governance. We welcome Quilter Cheviot’s thorough engagement programme which explains their views, the rationale behind them and their recommendations. This is a valuable contribution from a leading wealth manager that is clearly committed to the investment trust sector.”