Quilter Cheviot has called for investment trusts to improve the diversity of their boards and boost shareholder engagement in a move to enhance corporate governance in the sector.
According to a report by Quilter Cheviot, published today (September 5), investment trust boards are failing on board succession planning, meeting diversity targets and boosting shareholder engagement.
As part of its report, Quilter Cheviot provided 41 equity investment trusts with a red, amber or green rating on three criteria: board composition, board effectiveness and disclosures.
Just three investment trusts qualified for a green rating in each of the categories, while two received a red rating across the board.
Quilter did not specify which firms these were.
The category with the highest percentage of green ratings was board effectiveness, at 70 per cent, while 63 per cent of the boards achieved a green rating for composition and effectiveness.
Board composition had the greatest number of red ratings, with the most common reason for the poor rating being a failure to meet the UK diversity targets, the presence of non-independent directors, or one or more directors serving over the recommended tenure of nine years with no plans to resolve this, indicating a lack of succession planning.
Gemma Woodward, head of responsible investment at Quilter Cheviot, said: “The investment trust sector is far from homogenous, but there are in our view some common themes where there is room for improvement.
"While we are mindful that the regulatory landscape and shareholder expectations are constantly changing and what looked good a couple of years ago has now perhaps lost some of its shine, it is important these improvements are not ignored.
She added: “We have seen some signs of improvement already, but clearly, as some comments from those chairs we questioned suggests, there is a way to go in some cases.
"Ultimately, we want to work in partnership with the trusts where we are shareholders on behalf of our clients, to ensure that the sector keeps pace with expectations and regulations and ultimately produces good investment outcomes.”
Reaction
While most investment trust boards were receptive to the scrutiny the project provided, others felt it was pointless.
The report said: “One chair was not receptive to the idea of disclosing information regarding the manager’s engagements with the trust’s underlying holdings.
“Obviously to be told that engagement is fatuous whilst you are in the middle of an engagement is a special experience.”
The report found that companies could risk governance failures without ongoing succession planning.
It said directors should be aware of “tenure cliffs” where multiple non-executive directors leave boards at the same time.
Another point made by the report was that personal wealth should not be a barrier to becoming a non-executive director and work on this aspect could improve the diversity of boards.
The report added: “Whilst statistically board diversity metrics have improved significantly over the last decade, this remains problematic in parts. Whilst we do not invest in any trusts where there is no female representation, a few boards have work to do on this, and ethnic diversity remains an issue that a number of boards have not addressed sufficiently.”
Richard Stone, chief executive of the Association of Investment Companies (AIC), welcomed the engagement programme.
He added: “Investment trusts’ independent boards of directors are important guardians of shareholders’ interests. Boards have been particularly proactive this year in their pursuit of shareholder value, proposing mergers, reducing fees and even proposing the winding-up of companies.
“Shareholder engagement is a critical component of good governance.”
Quilter Cheviot said for the investment trusts where red areas of concern have been identified, it will be in touch very soon.
In the most serious cases it has already escalated its engagement with a formal letter to the board indicating that unless the situation is remediated, the firm will be voting against management at the next shareholder meeting.
Quilter Cheviot said it will monitor progress of this engagement and make a start on the next phase with a focus on investment trusts in the private equity space, before moving on to those involved in infrastructure and real estate.
tara.o'connor@ft.com
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