Are Investment Trust Boards Fit for Purpose in 2023?
By Amanda Floyd
In an effort to understand the current diversity data for leading investment trust boards, Director & Head of Investment, Amanda Floyd, has researched the board make-up of a selection of leading UK investment trusts. Her research looks at how many women and how many people from ethnic minority backgrounds sit on each board. In addition to this primary research, gathered by Amanda and the Beaumont Bailey Investment practice, she has also recently undertaken searches for clients which involved researching age diversity across the sector, findings from which will also be referenced in this report. The objective of this activity is to ascertain whether modern Investment Trust boards are fit for purpose, to ultimately help build fairer, more diverse boards of the future.
Board diversity and good governance
The importance of diverse representation for boards is well-founded. In addition to reflecting shared social values, diverse board composition is a significant and measurable contributor to board effectiveness across all sectors.
In its simplest sense, diversity means having many individuals that are different from one another. Generally, board diversity strives to make the board less homogenous by considering gender, racial and sexual diversity – three of the protected characteristics of equality, diversity & inclusion (ED&I) – of its members.
The board’s primary responsibility is to provide strategic direction and oversight for the organisation and ensure it complies with all relevant laws and regulations. A diverse and effective board of Directors is crucial for good corporate governance and a company’s long-term success and sustainability.
There is broad consensus that, historically, investment trust boards took a pretty passive approach to governance but that over the past decade the standard of those boards and their interaction with shareholders has improved markedly. This has been largely driven, among other factors, by the elevated profile of investment trusts as greater numbers of retail investors have accessed them through online platforms, more direct competition with open-ended funds, and a wider drive to improve diversity on company boards.
Fiona Hathorn, CEO of Women on Boards: “I strongly believe many Investment Trust boards are in need of a total revamp and applaud Beaumont Bailey for highlighting the issues in this important report.”
What should investment trusts be aiming for?
In April 2022, the Financial Conduct Authority (FCA) announced positive diversity targets for listed companies and if organisations can’t meet these, they must explain why not.
In their reports, listed businesses must make a transparent statement as to whether they have met the following targets:
- At least 40% of individuals on the board are women;
- At least one of the senior board positions (consisting of the Chair, Chief Executive Officer, Senior Independent Director or Chief Financial Officer) is held by a woman;
- At least one individual on the board is from a minority ethnic background.
Beaumont Bailey and other executive search firms play an important role when it comes to building the diverse boards of the future we strive for. At Beaumont Bailey, we commit to a 50% diversity pledge on every shortlist and have also developed active partnerships with influential membership organisations who are championing greater ED&I across our industries. We also partner with Women on Boards UK and the Diversity Project, who often share advice, data and best-practice when it comes to diverse hiring.
After reading about the positive changes to board demographics across the corporate world in recent years, we wanted to understand if investment trust boards were following the trend and improving their minority representation too. Beaumont Bailey reviewed the board make-up of 30 of the top UK Investment Trusts – see our findings below.
It is incredibly positive to see such a healthy gender split but I was dismayed by the findings of our research on ethnic representation. 11% ethnic representation on investment trust boards is low and I would argue a by-product of ‘fishing in the same candidate pools’.
In addition to our primary research, we also took a look at some existing data and industry commentary to compare against our own findings. In the latest Skin in the Game Report, covering 298 investment companies and 1,445 Chairpersons and Directors, Investec Securities’ research found that two-thirds of companies in the report met the target to have at least 40% female representation on boards. It also highlighted a significant boost in the number of trust Managers and Directors putting their own personal money to work in the trusts they run, signifying they are aligning their interests with those of their investors.
Fiona Hathorn: “There is an urgent need to appoint NEDs from non-traditional backgrounds on these boards, yet the problems go beyond lazy recruitment practices. Our confidential support service to Women on Boards members disproportionately hears from even accomplished NEDs struggling with Investment Trust boards, due to entrenched culture and/or poor onboarding processes.”
Investment Week also recently reported that the percentage of all-male investment trust boards has dropped to less than 5%, which represents a significant improvement in gender diversity. Despite these positive uplifts in diversity data amongst investment companies there is still work to be done, particularly when it comes to ethnic diversity.
Annabel Brodie-Smith, Communications Director at The Association of Investment Companies: “It’s important to recognise that investment company boards have made significant progress on diversity in recent years. Now 40% of investment company directors are female, meeting the FTSE Women Leaders target. Of course, there is more work to do particularly on ethnic diversity. The AIC is encouraging more people to consider becoming investment company directors. We have launched a website, Pathway and are participating in seminars to widen the pool of candidates.”
Where can improvements be made?
A potential contributing factor to the poor ethnic diversity we see across investment trust boards is that there is a high number of specialist trust Non-Executive Directors (NEDs) who sit on multiple boards or move from one trust to the next. A more lateral approach is needed and we would like to see more investment trusts take a leaf from other investment management businesses who are increasingly prioritising non-traditional investment and finance profiles with an emphasis on strong B2C engagement and digital transformation skills. I have sat down with a number of Chairs and experienced NEDs in the space this year and whilst some are open to change and the adoption of different approaches, many are set in their ways and will continue to adopt the same approach. This often means working with a handful of search firms that dominate the space and have a tendency to source candidates from traditional backgrounds and rely on ‘tried and tested’ NEDs who they’ve placed multiple times!
Another approach we are seeing is some trusts using digital platforms as a more cost effective solution to access a wider pool of candidates. This is commendable in many ways but has its limitations as there is a distinct lack of strategic thought (around board composition and board culture) and no rigour to the assessment of candidates.
Ominder Dhillon, Non-Executive Director at City of London Investment Trust PLC and Fidelity Special Values PLC: “It is important to recognise that gender and ethnic diversity are only approximate shortcuts for improving the cognitive and experience-based diversity of boards. If the entire board hail from similar types of firms, universities or socio-economic backgrounds then there can be no diversity dividend, even if the board is wholly comprised of optically diverse individuals. Looking underneath the label ensures the board is getting the sort of diversity that increases effectiveness… The advent of digital technology to service and communicate with clients means that age diversity is more important than is often appreciated too. Younger generations have different expectations as clients, as well as sourcing and consuming information in a different manner than their parents.”
Bringing a fresh perspective through age diversity
The investment trust arena suffers from a distinct lack of diversity of experience and perspective, which manifests most clearly in the lack of age diversity. Beaumont Bailey recently completed a NED Trustee Search for a leading master trust business. Aware that the future of the business relies on engaging a younger demographic of investors, we gravitated towards younger candidates than most typical NED searches. The client was acutely aware that to grow market share and future-proof their business the right candidate needed a strong understanding of D2C marketing and must be well plugged into UX, different digital tools, and platforms to drive enhanced engagement.
Engaging Millennial and Gen Z investors and effectively communicating the benefits of investing in investment trusts is crucial for the future development of the sector. From what we have observed, investment trusts have been behind the curve here and many of the next generation of investors would not be clear on the nuances of Investment Trusts and benefits of investing versus Open Ended Investment Companies (OEICs) or other investment vehicles. There doesn’t appear to be the same appetite for investment trusts amongst my peer group of investors versus my parents or grandparents generation. This is not a quality of returns issue, this is a communication and engagement issue. The approach we adopted for our master trust client proved highly successful in producing a diverse slate of candidates with an experience set that taps into key trends shaping the investment industry.
Alexandra Innes, Portfolio NED & NED at Schroder European Real Estate Investment Trust: “In terms of age diversity, I agree fully with the ‘client lens’ approach that this research proposes, with the need for Investment Trusts to continue to attract a more diverse, and younger, investor base, alongside their current investor base.”
Governance, turnover and tenure…
As reported by Portfolio Adviser, there have been some governance concerns in light of the recent Home REIT saga and TLEI’s suspended shares. In particular, issues of widening discounts, wealth manager consolidation (leading to ever more centralised buy lists) and retaining relevance in a crowded market has meant that strong boards that effectively represent shareholder interests have become vital.
These recent events come off the back of the high profile boardroom row over governance rules that took place at Scottish Mortgage Investment Trust back in March, resulting in Chair Fiona McBain stepping down from the board. At the heart of this row was the length of McBain’s tenure – she had been a Director since 2009 and Chair since 2019, and it was argued she was long past the point where she has any independence.
Interestingly, there has been a spotlight shone across the wider industry on the length of NED tenures, with two NEDs at Liontrust, the FTSE 250 fund group, quitting in March 2023 over a row about the Chair’s 12-year tenure on the board. According to Spencer Stuart, the average tenure of non-executive directors (including chairs) at FTSE companies is 4.3 years. However, a small proportion of NEDs (4%) and chairs (8%) have served for longer than 9 years. In the investment trust space a significant number of NEDs and Chairs are serving two terms of 3-4 years and there is no official cap on terms served.
This begs the question, where should the line be drawn? According to the UK Corporate Governance Code, the recommended tenure limit for the Chair is 9 years. There is no recommended tenure for NEDs – but after 9 years they are no longer considered independent. In many instances, this acts as a ‘de-facto’ ceiling on tenure.
However, the Code’s recommendations are not mandatory and only apply to premium-listed companies – although they are an influential benchmark across much of UK plc. Companies are asked to apply their provisions on a ‘comply or explain’ basis. This allows boards some room to extend the tenure limit beyond 9 years, supported by comprehensive explanations to investors and other stakeholders. It must be made clear that the UK Corporate Governance Code does not apply to investment trusts which follow The AIC Code of Corporate Governance, which states there are no tenure limits. Our view is that tenure limits can be a great tool for companies to appoint younger Directors, with fresh perspectives and diverse backgrounds, who bring a different approach and it prevents the concentration of power within a ‘cosy club’. New perspectives and a healthy exchange of views are a key aspect of an effective, functioning board.
Alexandra Innes: “I also don’t see any reason why Investment Trust NED tenures should typically be 9 years, when 6 years is more the norm across the broader industry. Making 6 years the norm would allow for swifter progress, and be additive to bring in fresh perspective more often. I would encourage sometimes having 100% diverse shortlists, rather than 50%, if the board feel more diversity of thought is needed.”
On the flip side, too much turnover is not fit for purpose either and having room to manoeuvre seems sensible in certain circumstances that may favour a higher level of continuity and stability. If a company is in in the middle of a corporate transaction, for example, or in need of stability during a period of market flux (like the Coronavirus pandemic), security is preferable. Identifying and recruiting the right candidates for board roles is not an easy task and may take some time. When they’ve been appointed, the Chair or CEO may have to invest significant time to ensure that new Directors properly understand the issues. It is often said that Directors are not fully effective until they have spent at least a couple of years in the job and hit peak effectiveness at 3-5 years in post.
Elizabeth Stheeman, Non Executive Chair at Edinburgh Investment Trust PLC: “An excellent piece of research – thank you for your focus on this important topic.”