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Scottish Mortgage seeks to reduce ‘skin in the game’ threshold

We explain a rule change Scottish Mortgage shareholders are being asked to vote on

2nd June 2021 09:37, by Kyle Caldwell from interactive investor

The UK’s largest investment trust is proposing a change to its directors’ share qualification rule in its forthcoming annual general meeting.

At present, new members to the board of Scottish Mortgage Ord will need to put nearly £57,000 of their own money into the investment trust.

This is due to an historic rule, under which a minimum amount is required by directors to sit on Scottish Mortgage’s board…

Scottish Mortgage points out that due to its share price significantly exceeding its nominal per share value “any new director appointed to the board needs to make a substantial personal financial commitment when joining”.

What is ‘skin in the game’ and why it matters

Directors and fund managers having their own personal investments in the companies they direct or manage aligns interests with shareholders. Bear in mind, though, that this does not guarantee success.

Alan Brierley, director of investment companies research at Investec, says he is relaxed regarding whether an investment trust has a rule in place that requires a minimum amount to be invested. The main thing, he notes, is that “directors have some of their personal wealth in the investment trust”…

James Carthewhead of research at QuotedData, says he completely agrees with Scottish Mortgage’s rationale for amending the rule.

He adds: “It isn’t reasonable to expect that a new director should be able to stump up £57,000 before being allowed to join a board. Apart from anything else, it entrenches a lack of diversity among boards whose members should not only be drawn from the ranks of the wealthy.”

But, in echoing the same sentiments as Brierley, he says “unless there are extenuating circumstances to prevent it, directors should also be shareholders”.

He adds: “There is something of a lobster pot situation with directors’ shareholdings. It is always seen as a bad sign if a director sells shares, unless there are very good reasons why a sale is forced on them. For that reason, not only are the directors’ interests aligned with shareholders, they should also be focused on what is best for the business in the long term.”

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