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Investment trusts have been warned that they must improve board diversity and succession planning, as well as shareholder engagement, months after the chairman of Britain’s largest trust resigned over tenure issues.
A Quilter Cheviot report says some equity investment trust boards are failing to meet racial and gender diversity goals, engaging with shareholders inadequately and failing to abide by corporate governance rules regarding director tenure.
The investment manager, who surveyed 41 trust companies, described them as “a mixed bag” of corporate governance and warned they could erode their market value as a result. There are fewer than 400 enclosed vehicles in the UK.
Gemma Woodward, head of responsible investing at Quilter Cheviot, said boards were at risk of becoming too “comfortable and clubby”, adding that she wanted the trust’s board of non-executive directors to be “restructured”. “.
Woodward said she was “tired” of investment trusts trumpeting the importance of cognitive diversity without meeting diversity targets, and that trusts needed to consider younger generations to fill board seats.
While the number of women on investment trust boards has reached the 40 per cent target of the government-backed FTSE Women in Leadership Framework, no data has been collected on board compliance with the racial diversity recommendations set out in the Parker review.
Quilter Cheviot said that while most boards were open to “constructive challenges and discussions”, not all were, with one board chair calling shareholder involvement “stupid”. Some boards are “rarely bothered by shareholders calling for meetings,” with one chairman saying he hasn’t seen shareholders in seven years, but adding that shareholders have work to do, too.
The asset manager added that the tools used to assess whether non-executive directors were carrying too much on the board were “blunt” and needed a more informed assessment.
Corporate governance issues were at the heart of a boardroom row earlier this year that led to the departure of the chairman of FTSE-listed Scottish Mortgage Investment Trust.
Amar Bhidé, a former non-executive director of Scottish Mortgages, has criticized governance, including the tenure of chair Fiona McBain. UK corporate governance codes recommend a nine-year term for the chairman of the board.
Underperformance by investment trusts and increased competition from cheaper passive funds in recent years has prompted a wave of consolidation in the industry as managers try to cut costs. Stifel analysts said the report will add to pressure on those vehicles, 38% of which were trading below their net worth in early August.
Richard Stone, chief executive of the Investment Company Institute, said the trust committee was an “important guardian” of shareholders’ interests, but “there is always room for improvement”.
The Quilter report also said bigger was not always better when it came to governance, arguing that trusts with a market capitalization of more than £2bn scored poorly on board competition and efficiency.
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