Investment Funds

Profession:Herbert Smith

Investment Companies: Recent Developments in Corporate Governance

Recent months have seen significant developments in relation to corporate governance issues affecting investment companies. January 2003 saw the publication of the Higgs Report on non-executive directors. This was swiftly followed by the publication by the Association of Investment Trust Companies of their Draft Code of Corporate Governance, itself drawing on the provisions set out in the Higgs Report. In addition the Financial Services Authority, prompted by the recent issues surrounding split-capital trusts, has published consultation paper 164 (CP164) which contains among other things additional proposals addressing the relationship between investment companies and their managers.

This briefing seeks to highlight a number of areas particularly pertinent to investment companies where either the provisions of the Higgs Report do not reflect current practice in the industry or where apparent tensions exist between the Higgs Report, the AITC Draft Code and/or CP164.

Manager Representation at Board Level

While the Higgs Report stresses the importance of independent non-executive directors, it also makes quite clear that it considers it desirable that there should be strong executive representation on boards. In the case of investment companies, the equivalent of an executive representative would normally be taken to be a representative of the investment manager. By contrast, CP164 proposes a new listing rule which would have the effect of precluding a director or employee of, or a professional adviser to, the investment manager from being appointed to the board of an investment company. Despite the perceived determination of the FSA in relation to this issue, we consider this proposal to be wrong in principle and in conflict with the wider aims expressed in the Higgs Report. It also clashes with the position suggested by the AITC Draft Code, which would permit a manager appointee to sit on the Board. CP164 seems to place too great an emphasis on the possibility of undue influence by a manager appointee and insufficient weight on the benefits of having a director with real executive responsibility, duly appointed, as a member of the board and required to act in the best interests of the investment company's shareholders. In our view, a properly operating board of independent directors with a suitably constituted management engagement committee tasked with reviewing the...

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