By Cliff Weight, ShareSoc Director
The new remuneration guidelines from the Investment Association have this to say about Share Ownership:
- Non-Executive Shareholding
Shareholders encourage non-executive directors to own shares in the company. Chairs and non- executives may receive part of their fees in shares bought at the market price. However, shareholders consider it inappropriate for chairs and independent directors to receive incentive awards geared to the share price or corporate performance.
I support this guideline but also suggest Chairs and NEDS, with inadequate shareholdings, should have half their fees paid in shares. Evidence in a recent report released by Investec shows why my idea is necessary:
- Many chairman own no shares in their trust, but some managers have significant stakes.
- One in 10 investment trust board directors have no personal investment in the shares of the trust they oversee,.
The report found that 16% of directors had no personal investment in in the trust they oversaw. However, excluding those who had been appointed only within the last year (and who may not have purchased yet), that fell to 10%. That figure was slightly up from 2018’s figure of 9%, although below 2014’s figure of 12%.
Moreover, a total of 6% of chairman had no shares in the trust they oversaw. Some of the most well-known trusts had board chairmen with no investment, including Aberdeen Standard Asia Focus (LSE:AAS), Lindsell Train (LSE:LTI), BlackRock Smaller Companies (LSE:BRSC), and RIT Capital Partners (LSE:RCP).
Numbers for investment by management team are harder to quantify as there is no requirement for disclosure. However, where possible the report did identify management and management teams with large stakes in the trust they manage. The Rothschild family in RIT Capital had the most skin in the game, with £703 million invested in the trust they manage, followed by the management teams of Pershing Square (LSE:PSH) (£668 million) and Tetragon (LSE:TFG) (£257 million).
The report identified a total of 31 managers with more than £10 million invested. A total of 50 managers had skin in the game of more than £1 million.
However, the figures showing that one in 10 board directors have no holdings may be troubling for investors who place weight on the importance of skin in the game for fund management. Having the board and managers directly invested in the trust they oversee sends “a clear and powerful message”, according to Investec, that the interest of the board, management and investors are aligned.
However, the report did also find that skin in the game does not always guarantee good returns, especially if management holds a large stake.
For example, the report identified JZ Capital Partners (LSE:JZCP) as having significant skin in the game, with aggregate investments of £100 million. Despite this, over the past five years JZ Capital delivered shareholders a total return of just 25%, significantly below its peer groups return of 102%. At the same time, the average discount over the past five years has been 37% compared to the trust’s peer group’s average of 17%. Despite this, management was still awarded base and performance fees totalling $128 million in the five years to February 2019.
In regard to JZ Capital, the report suggests that significant stakes by management may have given management too much power, in turn weakening corporate governance.