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Investment trusts have been warned they must improve the diversity and succession planning of their boards, as well as shareholder engagement, months after the chair of the UK’s biggest trust stood down after a row about her length of tenure.
Some equity investment trust boards are failing to meet ethnic and gender diversity targets, display inadequate levels of engagement with shareholders and are not adhering to corporate governance rules on director tenure, according to a report by Quilter Cheviot.
The investment manager, which surveyed 41 trusts, described them as a “mixed bag” in terms of corporate governance and warned they risked denting their market value as a result. There are just under 400 of the closed-ended vehicles in the UK.
Boards are at risk of becoming too “cosy and clublike” said Gemma Woodward, head of responsible investment at Quilter Cheviot, who added that she would like the pool of non-executive directors on trust boards to be “shaken up”.
Woodward said she was “bored” of investment trusts talking up the importance of cognitive diversity while not reaching diversity targets, and trusts need to look at younger generations to fill board seats.
Although the number of women on investment trust boards has hit the 40 per cent aim of the government-backed FTSE Women Leaders framework, data is not collected on boards’ adherence to ethnic diversity recommendations, laid out in the Parker review.
Elsewhere, Quilter Cheviot said that while most boards were open to “constructive challenge and discussion”, not all were, with one chair describing shareholder engagement as “fatuous”. Some boards are “rarely troubled” by shareholders asking for a meeting, with one chair saying he has not met a shareholder in seven years, but added that shareholders have work to do too.
The tools used to assess whether a non-executive director sits on too many boards are “blunt” and more informed evaluations need to take place, the asset manager added.
Corporate governance concerns were at the heart of a boardroom bust-up earlier this year resulting in the departure of the chair of the FTSE-listed Scottish Mortgage Investment Trust.
Amar Bhidé, who had been a non-executive director of Scottish Mortgage, criticised governance including how long chair Fiona McBain had been in post. The UK corporate governance code recommends a nine-year limit for board chairs.
Investment trusts have suffered in recent years with poor performance and rising competition from cheaper passive funds prompting a wave of consolidation in the sector, as managers attempt to cut costs. The report will add to pressure on the vehicles, 38 per cent of which were trading at a discount to their net asset value at the start of August, according to analysts at Stifel.
Richard Stone, chief executive of the Association of Investment Companies, said trust boards are “important guardians” of shareholders’ interests but “there is always room for improvement”.
The Quilter report also said bigger is not always better when it comes to governance, arguing that trusts with a market cap of over £2bn scored worse for board competition and effectiveness.
