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Investment trust boards: what do they do, and do they add value?

by Faith Glasgow from interactive investor, 9 May 2023:

The recent widely publicised spat between members of Scottish Mortgage’s board of directors has once again focused attention on investment trust boards as a unique aspect of the closed-ended fund structure…

Investment trusts are required to have independently elected boards of directors because they are structured as companies listed on the stock exchange…

The role of boards for investment trusts

They are not involved in day-to-day decisions or performance – that’s the job of the fund manager – but they can make important calls about the way the trust is run.

If the manager is chronically underperforming against peers, for example, it’s the board’s job to decide whether it is time to sack that manager and find another, or at least put them on notice.

The board is also responsible for setting the fee structure (for instance, whether to employ performance-related fees) and negotiation of fees with the manager.

It decides how the trust’s share price discounts and premiums to the value of the underlying assets should be managed, and establishes its dividend policy (for instance, whether to supplement income received by the trust with capital to maintain a set dividend payout)…

Past board criticism 

In practice, however, there has historically been criticism of investment trust boards on a number of fronts, not least the fact that many were heavily ‘male, pale and stale’, often had no personal stake in the trust as motivation to require good performance, and took a pretty passive approach to governance generally.

There is broad consensus that things have improved markedly over recent years..

As James Carthew, head of investment companies at QuotedData, observes: “Generally, the standard of boards and their interactions with shareholders are much improved over the past decade.”

Carthew picks out improvements in communications with shareholders as an example. “I was always concerned that retail investors who could not attend an AGM were not getting the same access to management teams as institutional investors,” he explains.

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