Fund management groups increasingly talk about the importance of corporate governance in their investment processes. So it is a shame that, despite some headline-grabbing changes, the concept has yet to permeate their investment trusts as well.
For some, active or engaged investing is an important facet of their work. Many managers believe making investments in companies that demonstrate either good or improving environmental, social or governance practices leads to better returns for clients. Others – probably the majority, it is sad to say – are making changes as a result of demand and influence from investors.
Guides such as the UN-supported Principles for Responsible Investment (PRI) have been embraced by fund managers and some advisers – Charles Stanley itself became a signatory in 2015.
Its principles are broad but generally encourage an improvement in its signatories’ practices. But no investment trusts, to our knowledge, adhere to its requirements.
This is a rather long preamble to again ask the question – why do investment trusts need non-independent directors on their boards?
Our interest in this question – hardly a novel one – was piqued by the recent announcement from the board of Fidelity China Special Situations trust that a senior Fidelity employee was to join the trust’s board. It is unclear to us, as minority shareholders, why this is in the best interests of our clients.
It is very clear, however, why having a connected party is in the best interests of the fund manager. Investment trusts are not so unique that best governance practice should not apply to them.
However, the point is not to pick on Fidelity. I have heard the arguments from the sector about why it is helpful for a board to have a fund management representative as a member ad nauseam – and, frankly, they don’t hold much weight.
It is also hard to argue that the best individual for a role – out of the thousands of available candidates that could have been selected – coincidentally worked in a senior role for a trust’s management group.
Those who know the sector, understand the concept of an investment trust board’s independence is a flexible one. Some are excellent and carry out their role – to represent the interests of all shareholders – in an active, open and transparent way. But many established trusts are overseen by notionally independent boards that have historic links between the trust and manager, which compromise independent thinking and action.
For those trusts with aspirations to be long-term winners in the sector, issues such as this are easy to fix.
Investors need to look at governance issues – and engage vigorously when proposals are not in their best interests. We are all responsible for leaving the world in a better place than we found it. In our own, somewhat narrow, world of closed-ended funds, we can do more to achieve that aspiration.
Stephen Peters is an investment analyst at Charles Stanley
