Boards represent shareholders’ interests and it’s the board’s responsibility to deliver what shareholders want. I’ve talked to non-executive directors of some of the abrdn investment trusts to get their thoughts and insights on what makes a board work well.
So what do shareholders want from their investment trusts and what is it that boards are trying to deliver? Well according to the AIC Code of Corporate Governance, a best practice framework for directors, shareholders want the best possible return at an acceptable level of risk which works with the company’s objectives. Shareholders want clear objectives and investment policies, an appropriate level of cost, shares that can be bought and sold easily, and timely and clear communication.
Being a board director is clearly no walk in the park. As David Hardie, chair of the £1.8 billion Murray International Trust explains: “The board of an investment trust company is the guardian of its shareholders’ interests. It is the responsibility, enshrined in law, of each director to act in a way most likely to promote the success of the company for the benefit of its shareholders as a whole.”
It sounds daunting, but it can be rewarding. Gay Collins is director of Dunedin Income Growth, abrdn’s UK equity income investment trust which celebrates its 150th birthday this year. “Being a board member over the last decade has been professionally satisfying, challenging and I’ve learnt a great deal,” she says. “I believe that the boards I’ve been on have made decisions that added value over time to the trust, and most importantly to the shareholders, by increasing its appeal to investors.”
Looking at who’s on boards, over 1,300 people are directors of investment trusts and each board has on average five members. Boards used to be considered “male, pale and stale” but things are swiftly changing and now 39% of directors are female. Diversity is an important topic and the Financial Conduct Authority has implemented rules on diversity. Gay Collins says: “It’s clear that change is afoot among today’s investment trust boards, with a greater mix in terms of skills, age, gender and ethnicity. That breadth in experience gives a real focus to our roles.”
For David Hardie, diversity on boards is important but getting the right chemistry is also key: “In my experience, a key ingredient of a successful board is chemistry. Diversity of thought and independence of mind mean that different views may well emerge on important issues. It’s the chemistry that allows a consensus to emerge and, after an appropriate airing of views, a decision being taken that is in the best interest of shareholders as a whole.”
For many shareholders, the board’s central role is to oversee the investment trust’s manager, monitor their performance and negotiate their fees. Neil Rogan, chair of Murray Income, explains: “Investment trust directors should be independent of their trust’s management company. They can challenge and question what the manager is doing, whether on performance, individual stock decisions or ESG matters. They can ensure that costs and charges are and remain competitive and on a gradual decline.” Last year, 27 investment trust boards negotiated fee changes to benefit shareholders.
If performance is not going well, boards have the power to take radical action. Ultimately, they have the ability to change the investment trust’s management company. They can also propose mergers between investment trusts, which can create larger trusts, make it easier for investors to trade shares, and bring down costs.
Neil Rogan has worked on two big investment trust mergers in the last three years. He explains: “Murray Income’s strong long-term performance record plus its low marginal fee rate of 0.25% proved pivotal in persuading the directors and shareholders of Perpetual Income & Growth Investment Trust to merge with Murray Income in 2020. Then, in 2022, my role was reversed as a director of the Scottish Investment Trust whose board and shareholders agreed a merger with JPMorgan Global Growth & Income in 2022.”
It’s important for boards to engage closely with their shareholders. Investment trust shareholders have a say in how the company is run, which they can exercise through voting and attending annual general meetings (AGMs). However, it can be difficult to persuade people to exercise these rights. Karen Brade, chair of abrdn Japan Investment Trust, emphasises this point: “Communicating with shareholders is one of the most difficult problems for boards. Unfortunately, AGMs are generally not well attended and many retail investors invest through platforms so we do not always know who they are.”
The AIC has been addressing this issue by running an annual Shareholder Engagement Award. Its purpose is to encourage investment platforms to help shareholders engage with the investment trusts they own. Jemma Jackson, Head of Public Relations at interactive investor explains the value of voting: “Private investors can have a powerful collective influence over a company’s direction, and perhaps especially so with investment trusts, given their prominence on many investment trust share registers. Since we switched all our customers onto our free voting service in November 2021, making it opt out rather than opt in, we have seen significant progress. The number of votes processed on our platform last year was up 30%.”
It’s clear that investment trust boards add value for their shareholders. Some of this work is behind the scenes which David Hardie, Chair of Murray International succinctly explains: “If the Board is doing a good job, you may barely notice it is there!” Investment trust boards take their roles seriously and are fully committed. As Gay Collins, director of Dunedin Income Growth emphasises: “Being a NED is about having valuable, relevant experience, being committed to shareholder interests and the shareholder experience, being open to ideas, diligent and innovative. You’ve got to want to make a contribution and add value.”
Risk warnings you should consider prior to investing:
- The value of investments, and the income from them, can go down as well as up and investors may get back less than the amount invested.
- Past performance is not a guide to future results.