Boards have traditionally been a selling point for investment trusts – by Cherry Reynard

Shareholders have a group of independent experts, tasked with looking after their interests. They hold the investment manager to account, help set the strategic direction of the trust, negotiate fees and other important work. However, occasionally it becomes clear that perfect alignment of shareholder and board interest isn’t always achieved.

The most recent example has been on Scottish Mortgage, where the long-standing chair Fiona McBain quit after a row over governance[1]. Non-executive director Prof Amar Bhidé had left the board, raising questions over McBain’s independence and whether she had fully interrogated the risks associated with the trust’s illiquid investments in private companies.

This is far from the first board controversy. The board of Neil Woodford’s ill-fated Woodford Patient Capital Trust was accused of being too close to the fallen star. Some members were also directors of holdings in the trust, creating clear conflicts of interest. It was difficult to see who was sufficiently independent to hold Woodford to account.

This matters because a board that is independent in name only is not doing its job of overseeing management and may do active harm if it is not monitoring risks properly. With this in mind, it is worth looking at the characteristics of a good board, and whether shareholders can be confident their interests are being managed effectively.

Look for a blend of people

In many cases, good practice differs little from a ‘normal’ company board. Investment trust boards need to have the right blend of people. This may be badged ‘diversity’, but it is really having the right structures in places to avoid vested interests and group-think. Nick Wood, head of investment fund research at Quilter, says: “We are looking at whether the board is diverse across areas such as gender, ethnicity, neurodiversity and so on, with the aim of ensuring it is diverse in its thinking and can challenge the investment manager effectively. We want to make sure it has the knowledge and experience to have a good conversation with investment managers.”

Remember to refresh regularly

Renewal and fresh talent is important, says Charlotte Valeur, a non-executive director on Bankers Investment Trust: “The various governance codes suggest a maximum tenure of nine years. It makes a difference getting new eyes, getting people coming in and asking questions that haven’t been asked for a while. It is also good to have a spread of tenures – you don’t want to have to rotate several directors in a single year. The idea that someone is indispensable on a board is very bad leadership.” Wood is also alert to ‘over-boarding’ – directors sitting on too many boards.

Keep curious

The aim is to avoid directors becoming too comfortable and not spotting issues. For Norman Crighton, who has served on the boards of eight investment trusts, it is about retaining intellectual curiosity: “I’m often asked ‘what are you looking for in a director?’ and it’s always intellectual curiosity. Directors have to ask questions. There might be 20,000 shareholders on the register and the board is there to ask all the questions that shareholders would normally ask if they were there. It often happens that someone asks an innocuous question and at that point, the fund manager flounders, and you end up discovering something quite important.”

A balance of skills and experience

Boards also need the right skills and experience. Valeur says that every board needs an accountant, a lawyer and a banker. It is also important that there is investment trust expertise as well, though detailed investment knowledge is less important than asking the right questions. She adds that knowledge on sustainability is increasingly important, as ESG considerations become more important for investment managers.

Act collectively

Valeur says that every board has collective responsibility, no matter where the skills lie within the board membership. She adds: “I don’t believe in silo-ing directors. We have to look at the board body. That board body should make decisions together and ask appropriate questions until they understand areas they don’t understand. We can’t hold all the knowledge, that’s the executive’s role, but we have to have an opinion on every agenda point. In law, we are collectively responsible.”

Make sure everyone gets a say

Once the right composition has been established, the board has to function properly as well. Crighton believes if anything, this is more important. He says: “It’s EQ as much as IQ”. That means creating a culture where everyone gets a say, and has the space to ask the right questions. He says: “I’ve been involved in the sector for 30 years and I may not have asked certain questions in a while – and the answer may have changed.”

There should also be a clear distinction on decision-making. Is the investment manager or board responsible for gearing? Or is it collaborative? Following sustainable development goals? Does the investment trust have a plan for net zero and who is responsible for setting it?

Independence is non-negotiable

Independence should be non-negotiable. Valeur says: “The board has to behave independently of the manager’s input. There can’t be signs that they are in any way sitting in the pocket of the manager.” For Wood, any influence of the investment manager on the board is a red flag. He has seen extreme examples where the investment manager is represented on the board. This is a major problem and at the heart of some of the recent problems in the sector.

Work in partnership

Most agree that while boards are improving, there is room for improvement. Crighton, for example, would like more collaboration with shareholders. Too often, he says, institutional shareholders will vote against a resolution at the AGM without consulting with the board to try and resolve the problem ahead of time.

Wood agrees that he is looking for a good partnership between the investor, the board and the investment manager. He is not looking for a revolution on boards, but incremental steps to improve on areas such as diversity and accountability. Where boards are weak on these issues, he would expect to see a plan to improve, rather than acting to remove directors.

Boards are a differentiating factor

Boards can be a key selling point for investment trusts, but investors need to ensure they are working properly to look after their interests. That means the right composition, but also ensuring that the board functions effectively and operates in line with best practice – on tenure, on diversity, on independence and on its relationship with the investment manager.

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