Wealth management firm challenges investment trust sector with long-term engagement programme

Quilter Cheviot has produced a number of recommendations for the investment trust sector following an in-depth engagement programme designed to improve the corporate governance practices and responsible investment disclosure within the sector.

During this first phase of the long-term engagement, Quilter Cheviot met with the chairs and other non-executive directors (NEDs) of 41 equity investment trusts.

The key findings include:

• Board succession planning should be managed on an ongoing basis and an inability to do so is a governance failure.
• Talking about cognitive diversity being important without reaching diversity targets is becoming very tired. Boards need to rethink recruitment.
• To aid transparency the names of executive search firms and external evaluators should be disclosed in the annual report.
• Having a points system to evaluate whether a NED is over-boarded is a helpful starting point to judge over-boarding and a foundation to build upon, however qualitative assessments should be used too.
• Boards should reconsider which stakeholders should engaged with through the external evaluation process.
• Responsible investment disclosure should be focused on the trust - it shouldn't be about the firm's approach.

The objective of the engagement was to improve the corporate governance practices and responsible investment disclosure in the investment trust sectors, primarily focusing on Board composition, board effectiveness and disclosures.

While most boards were open to constructive challenge and discussion, not all were, with one chair describing engagement as 'fatuous' when asked about providing more disclosure regarding the manager's approach to engagement.

Quilter Cheviot provided each investment trust with a red, amber or green rating on the three criteria. Only three investment trusts qualified for a green rating in each of the categories, while two received a red rating across the board.

The category with the highest percentage of green rating was board effectiveness, at 70 per cent, while nearly two-thirds (63 per cent) of the boards achieved a green rating for composition and effectiveness.

Board composition was the category that had the greatest number of red ratings, with seven trusts representing 17 per cent of the trusts within this universe. The most common reason for the red rating for board composition was 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.

Quilter Cheviot will monitor progress of this engagement while also embarking 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.

Gemma Woodward, head of responsible investment at Quilter Cheviot, said: “The investment trust sector is far from homogenous, but there is 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.

“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.”