Faith Glasgow discovers what a good board of directors looks like.
Ask any reasonably knowledgeable investor to list the most important benefits of an investment company versus an open-ended fund, and you’re likely to hear about the independent board of directors and its central role in representing shareholder interests.
Investment companies, like any other company listed on the stock exchange, have always had boards of directors overseeing proceedings; they are independent of the asset manager and have the power to hire and fire them, making it possible to hold them to account. But historically there’s been little focus on how the board works: it’s been viewed as a relatively passive job, a comfortable option towards the end of a successful career in finance.
The past decade or so has seen quite a shake-up. The implementation of the Retail Distribution Review in 2012 did away with the commission arrangements that had given open-ended funds a head start in financial advisers’ affections, and created a much more level playing field for funds and investment companies to compete for the attention of private investors.
The consequences have been working their way through the industry, but pressure to gain a larger slice of the private investor pie has undoubtedly been a big driver behind the changes taking place on many boards.
Of course, some key things don’t change: most boards continue to meet four or five times a year, with quite a bit of prep beforehand – a total of maybe two days’ work a month. As Lucy Walker, a director of Henderson International Income and chair of the Aurora Investment Trust (and at just 35 probably the youngest chair of any AIC member trust), observes: “I really hadn’t appreciated just how much time it takes to properly read the annual and half-yearly reports.”
Boards have also always had a number of ‘boring but important’ jobs on the agenda. These include, among others, setting dividend policy, negotiating the manager’s fee, refinancing debt to try and reduce the amount of interest paid, and keeping tabs on third-party suppliers.
The board also monitors the fund’s performance; if it has serious concerns about the ability of the manager to meet its investment targets, it may take steps to find a new one, arrange a merger or even, in a worst case scenario, wind the company up. As competition for retail custom and pressure to scale up operations have increased, it has become less comfortable for boards to give underperforming managers the benefit of the doubt.
But there are other pressing priorities to consider, as Gay Collins, a director of Dunedin Income Growth explains. “There’s much more focus on retail shareholders, especially over the past four or five years,” she says.
“We’re always thinking about how we find, attract and communicate with retail investors, and I’d be very surprised if most boards didn’t have that on their agenda now.” And that in turn means actively seeking out investors to understand what they need and what they want.
“Retail investors are enormously important to both of my boards, as they account for a significant proportion of our investors,’ comments Jane Pearce, a director on the Shires Income and Polar Capital Technology trusts’ boards. She reports that the main method of engagement with shareholders for both trusts is at the AGM and the lunch that follows.
However, boards’ initiatives to reach out to private investors now come in many other forms. They include using less lofty, jargon-ridden lingo, making the annual report and accounts more accessible and interesting and the website more engaging, boosting social media coverage and improving shareholder participation via broker platforms.
The AIC’s new Shareholder Engagement Award for the most proactive platform is an indication of the importance investment companies place on improving support in that area, not just in terms of education and investment choice for platform customers, but also by making it easier for them to vote, participate in AGMs and access documents.
The drive to engage with private investors has had another significant consequence: the penny has dropped that if you’re going to sell investment trusts in an increasingly competitive marketplace, it helps to have sales and marketing expertise on the board.
“The make-up of boards has changed significantly in the last decade,” agrees Collins, recalling “a sea of men” at her first AIC directors’ dinner. “JPM Overseas was unusual ten years ago in bringing me in, with a PR and comms background, to replace an outgoing investment professional.”
When Collins was appointed to the board of JPMorgan Overseas (now JPMorgan Global Growth and Income), she was tasked with the job of making the investment trust more attractive and competitive, against both other investment companies and open-ended funds.
“Of course I had to keep up with regulatory changes, talk to the managers, and keep across the fund administration along with the other directors, but I knew that when we got to the sales and marketing section of the papers, that’s where I needed to lead the debate. We were an ambitious board and it was incredibly stimulating – I really believe we added value for shareholders over the years.”
But women are increasingly present in other contexts too. Pearce came from an equity strategy and accountancy background; Walker, whose previous job was as head of fund research at Saracen, has recently left her full-time position to set up a fund data platform, and is very enthusiastic about the fact that her board and external roles “are all completely symbiotic”.
She makes the additional point that boards with real commitment to attracting a wider spectrum of investors are looking for “digital age skills” such as social media marketing. “It’s also an obvious way for boards to increase diversity more broadly by recruiting younger board members,” she observes.
What about the increasingly widespread expectation that directors should show their commitment to the investment company by holding shares in it? ‘Skin in the game’ is an appropriate expectation for older, wealthier board members – but not necessarily so feasible for younger people with children and mortgages.
As Walker puts it: “Skin in the game is important, but if boards are going to become more diverse it’s got to be relative to what’s feasible for the individual. Where young people are concerned, a smaller holding shouldn’t be interpreted as a lack of conviction around the trust.”
It’s clear that change is afoot among today’s investment company boards, with a greater mix in terms of skills, age, gender and ethnicity a real ambition for many. So what does a ‘good’ board member look like? It’s certainly not just a matter of lunches, skimming board papers and box-ticking, says Collins.
“It’s 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.”
Walker concurs. “Directors need to know what’s going on, be aligned around the trust’s goals, and put in the work at and between meetings to get things done,” she says. “Representing shareholders is a really important job.”
