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Ignoring the UK Corporate Governance Code

Last week there were Annual General Meetings of the Baronsmead 1 and 2 VCTs (BDV and BVT) and the British Empire Securities and General Trust (BTEM) on the same day. These companies are all investment trusts although the latter is of course somewhat different in nature to the two Venture Capital Trusts. They do have one thing in common though – they both claim to be able to report against the AIC Corporate Governance Code rather than the UK Corporate Governance Code.

For example the Baronsmead 1 Annual Report says: “The FRC confirmed in January 2013 that they considered the updated AIC Code to be appropriate and that investment companies may report against the AIC Code” (this is based on a letter received by the AIC and circulated to their members). There is unfortunately one thing wrong here. The Association of Investment Companies (AIC) is, to quote from their web site, “the trade body for closed-ended investment companies“, i.e. it represents the interests of those companies and their fund managers, it does not represent the interests of investors in those companies.

The British Empire Annual Report says something similar – specifically: “The FRC has confirmed that AIC member companies who report against the AIC Code and who follow the AIC Guide will meet the obligations in relation to the UK Code and associated disclosure requirements of the Disclosure Rules

Now the AIC Code is useful in some regards in that it covers matters specifically of relevance to investment companies. But in respect to the length of tenure of non-executive directors it’s policy position is quite different. It says “Many shareholders and commentators have a view that lengthy service on a board can compromise independence from the manager or the executive team of a self-managed investment company. The AIC does not believe that there is any evidence that this is the case for investment companies and therefore does not recommend that long-serving directors be prevented from forming part of an independent majority. However, where a director has served for more than nine years, the board should state its reasons for believing that the individual remains independent in the annual report“.

The UK Corporate Governance Code takes a very different stance on this, and surely one that is much wiser. One of the failings in investment trusts is long serving directors who become too sympathetic to the needs and desires of the fund manager, or do not take action soon enough when the company is running into problems. Length of service tends to go along with age and can lead to inaction when it is time for change.

This issue arose at the Baronsmead VCT 3 AGM earlier in the year when the Chairman, Mr Townsend, said that the UK Corporate Governance Code allows them to simply comply with the AIC Code, i.e. that there is a specific reference in there to the AIC Code, and he suggested I read it. As I was not in a position to dispute this statement at the time, I let it pass. But I did take it up with the FRC and their Chairman, Sir Winifried Bischoff, responded with a letter that includes the statement “We do not consider the AIC Code and guidance to be an alternative standard….. nor does it absolve AIC members from their obligations under LR 9.8.6 including the obligation to provide an explanation when choosing not to follow the Code“. I subsequently sent a letter to Mr Townsend that spells out that not only is he mistaken, but it seems to me that the company is deliberately flouting the principle that directors should only serve for a limited duration.

In case you think this is an academic issue, I have many times in the past seen that boards of companies, particularly investment trusts, where the directors have been there too long are averse to change, often ignore problems, do not take vigorous action when required, and are often too sympathetic to the needs and desires of the fund managers in investment companies. The board effectively becomes a cosy talking shop with the manager dictating events (the board only meets 4 times a year at Baronsmead VCT 3 for example). There was a good reason for the “9 year” rule for length of service of directors and it should not be ignored. Saying somebody is still independently minded is not enough explanation under the “comply or explain” rule. It should really only be in exceptional circumstances that directors are allowed to continue with specific and good reasons given.

Returning to the affairs of Baronsmead 1 and 2, both have Chairmen who have been there a very long time. Number 2 also has a director, Gillian Nott, who has served since 1998 and is also on the boards of Baronsmead VCT3 and VCT 5. Yet she is claimed to be the “Senior Independent Director”. Independent she is surely not.

Now I have nothing against Mrs Nott personally and no doubt she has lots of knowledge and experience of VCTs, which would of course be enormously useful on other VCT boards which do not achieve the same performance as the Baronsmead VCTs. But ignoring the UK Corporate Governance Code regarding the length of service of directors sets a very bad precedent.

The Baronsmead VCTs have performed very well in recent years, no doubt because of the skills of the fund manager, but British Empire has not. The Annual General Meeting of the latter was a somewhat depressing affair because the fund manager repeated what had been said in previous years, i.e. that there was a lot of unrealised value in the portfolio. The Chairman, Strone Macpherson, has been on the board for 11 years and shows no sign of retiring. As in the previous year, shareholder questions and comments were cut short by scheduling the meeting for 12.00 am when lunch was scheduled for soon after 1.00 pm. In this writer’s opinion, this company needs to look very hard at whether its investment policy and/or the fund manager should be changed because the results in recent years show the strategy is not working. Would a new, younger Chairman be more likely to take the necessary steps? Perhaps so.

One can understand why the AIC and its members think that having long-standing directors on boards of investment trusts is a good idea, but as an investor I do not agree. The principles laid down in the UK Corporate Governance Code on length of service were surely sound and should be adhered to unless there is a very good reason to do otherwise.

Note that there are full reports on the Baronsmead VCT and British Empire Trust on this page, which give more background on these companies.

Roger Lawson

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