Scottish Mortgage AGM: a guide to what the resolutions mean

Shareholders of Scottish Mortgage (LSE:SMT) Investment Trust will have additional voting duties on 4 July, the date the popular Baillie Gifford growth-focused fund holds its AGM in Edinburgh.

The meeting, which was arranged before Rishi Sunak called a general election for the same day, is one of the most important in the AGM calendar and provides a rare opportunity to hear directly from and question two of the UK’s most senior investment managers.

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Baillie Gifford’s Tom Slater and Lawrence Burns will have plenty to discuss following a stunning year for the trust’s largest holdings, the semiconductor firms NVIDIA Corp (NASDAQ:NVDA) and Netherlands-based ASML Holding NV (EURONEXT:ASML), and a much more challenging one for Tesla Inc (NASDAQ:TSLA).

Overall, it’s been an improved period for Scottish Mortgage after negative returns in both net asset value (NAV) and share price in the previous two years. 

Across the decade, Scottish Mortgage shares have increased by 381.9% compared to a 218.2% rise in the FTSE All-World index on a total return basis. It’s also an AIC “dividend hero”, having increased its payout for 41 consecutive years. 

The meeting is also an opportunity for shareholders to ensure that board members are providing sufficient challenge and support to the investment managers, and that the trust is offering value for money through low costs.

The ongoing charges ratio, which is total expenses as a percentage of the average net asset value, rose slightly to 0.35% from the previous financial year’s 0.34%.

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Areas of focus at the AGM will include a plan to increase the aggregate annual limit for directors’ fees to £500,000 and on succession planning given that the chair and senior independent director joined the board in 2015 and 2016 respectively.

Here’s a run through of some of the key resolutions for shareholders to consider. The deadline for ii customers to cast their votes ahead of the meeting is 28 June.

Election of directors (resolutions 3-9)

The tenure of recently appointed chair Justin Dowley is approaching nine years, having joined the board in September 2015.

Nine years is the recommended time limit under the UK Corporate Governance Code, but externally managed investment companies such as Scottish Mortgage may also choose to report against the Association of Investment Companies (AIC) Code of Corporate Governance.

This does not impose any time limit on the tenure of directors.

The annual report highlights the board’s view that the simple imposition of inflexible numerical based limits is not the best way to ensure ongoing diversity and board refreshment overall.

It said: “Further, the board wishes to retain the flexibility to be able to recruit outstanding candidates when they become available rather than simply adding new directors based upon a predetermined timetable.”

Despite this, the company has said succession planning for Dowley’s role as chair and Patrick Maxwell as senior independent director is ongoing. 

The newest member of the board is Stephanie Leung, who was appointed to the board with effect from 1 August and is standing for election at the AGM for the first time.

Leung has spent about 25 years in executive leadership roles in large enterprises and tech-led businesses, most notably for Uber in Europe, Middle East and Africa. She is the co-founder and CEO of KareHero Group, a social mission driven enterprise that helps working adults balance their careers while caring for elderly relatives.

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Vikram Kumaraswamy and Sharon Flood were also appointed to the board during 2023 but are subject to a re-election vote at this year’s AGM. 

Flood, who has held senior leadership roles at Sun European Partners and John Lewis Partnership, previously served as chair of Seraphine Group and as a non-executive director at Pets at Home, Crest Nicholson and Network Rail.

Kumaraswamy leads portfolio development and capital allocation for Unilever, with responsibility for strategy, M&A sourcing and execution and competitor intelligence.

The other directors seeking re-election are Mark FitzPatrick, who was appointed chief executive of St James’s Place in December, and Cambridge University professor Patrick Maxwell.

The latter joined the Scottish Mortgage board in 2016, bringing extensive knowledge and experience of the biotechnology sector.

Dowley is a former international investment banker who is currently deputy chair of the Takeover Panel and chair of FTSE 100-listed GKN Aerospace business Melrose Industries.

The annual report said appraisals have concluded the performance of each director continues to be effective and that they are capable of devoting sufficient time to the company. 

The gender split of the board stands at 33%, which is short of the Financial Conduct Authority Listing Rule that 40% or more of board roles should be held by women. The company said its ongoing succession planning will take this target into consideration.

Remuneration (resolutions 2 & 16)

The board is seeking shareholder approval to increase the aggregate annual limit for directors’ fees to £500,000. This compares with the current limit of £400,000, which has been in place since 2019.

The change provides flexibility should the company need to increase its number of directors as part of long-term succession planning or its board refreshment policy.

It will also allow for future increases in directors’ fee levels over the medium to long term to ensure that the company can continue to attract suitable directors at competitive rates.

With effect from 1 April, the directors’ fee has been increased by 11% from £45,000 to £50,000 and for the role of board chair by 7% from £70,000 to £75,000. These are the first increases in four years.

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There are no performance conditions relating to directors’ fees and there are no long-term incentive schemes or pension schemes. No compensation is payable on loss of office.

As a closed-ended investment trust, the company does not have any executives or executive directors and as a result has no need for a remuneration committee.

Its remuneration policy was last approved at the 2023 AGM with 99.4% of shareholder votes in favour. It is due to be renewed at 2026’s meeting.

This year’s annual remuneration report shows that fees and taxable benefits amounted to £320,000 in 2024, broadly similar to the 2023 total. This compares with a 9.6% increase in shareholder distributions to £57.6 million.

The remuneration report also discloses the number of Scottish Mortgage shares held by directors.

Long-serving board member Justin Dowley had 208,998 shares at the end of March, a position worth £1.9 million at today’s price of nearly 900p. The next biggest holding is Patrick Maxwell’s 75,594, a level unchanged from the previous year.

Sharon Flood has an interest over 7,183 shares following her appointment in May 2023, while the stake of Mark FitzPatrick is unchanged at 10,000.

Resolutions 12-15

These seek to renew the directors’ authority to carry out certain corporate actions should these be necessary during the current financial year (Resolution 12: Authority to Allot Shares and Resolution 14: Authority to Issue Shares at a Discount to Net Asset Value).

In the case of resolution 15 (Market Purchase of own Shares by the Company), the authority to purchase up to 15% of shares in issue was utilised by the company in March when it announced a two-year £1 billion buyback plan.

At the time, SMT shares were trading near a 15% discount to net asset value. Buybacks provide shareholders with benefits including improved liquidity in the company’s shares and an immediate accretion to the net asset value per share.

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They are also regarded as a strong demonstration of confidence in the underlying valuation of the portfolio.

Resolution 13 concerning the disapplication of pre-emption rights gives the company authority to allot securities without first offering the securities to existing shareholders on a pro rata basis. This is up to a limit of 10% of the company’s total share capital.

Such a move provides the company with the flexibility to finance operations and future opportunities as and when required.