31st January 2025
At the end of last week, having read our last Crescendo, a diligent industry participant pointed out an interesting resolution buried deep in an investment trust’s notice to their 2025 Annual General Meeting (AGM).
Bankers Investment Trust (full disclosure: we do not own any shares in our multi-asset funds) are asking shareholders to vote on 15 resolutions, the last of which involves adopting new articles of association. There is some sensible stuff in there, including increasing the minimum required number of Directors from three to five, along with a great many other changes.
But what caught our attention (thanks to our friend in the industry) were two aspects of resolution 15:
- The new articles now require stricter conditions around the appointment of Independent Directors should the Company have a “substantial” shareholder (someone in control of 20% of more of the shares). This provision brings the trust into line with a Listing Rule that applies to commercial companies (rather than investment companies).
- The new articles provide that where the Company proposes to appoint a substantial shareholder or an associate of one, as an investment manager or adviser (or AIFM) the appointment must be approved by an ordinary resolution (majority vote of shareholders). Directors connected to the shareholder or the proposed investment manager / adviser / AIFM must not take part in the Board’s consideration of the proposed appointment and will not vote.
The very helpful Bankers notice goes on to explain that under chapter 8 of the listing rules, the appointment of an investment manager that is a related party does not require a vote.
We applaud this strengthening of shareholder protections, but wonder why they don’t go further? Whenever a Board proposes a change to an investment manager or adviser, why shouldn’t this be put to shareholders?
Often Boards run consultations ahead of a consultation ahead of the manager switch, but why not ratify these sorts of changes via shareholder votes? The problem with relying on shareholder consultation is twofold: 1) it’s impossible to prove that a sufficient proportion of the register approved of the proposals and 2) we frequently hear that major shareholders simply do not engage with Boards, so how do we know how deep the consultation ran?
In fact, we have lost count of the number of Boards who bemoan the complete lack of shareholder engagement – even by their very largest shareholders. We have sympathy for Boards who are accused of poor corporate governance when they can’t even meet a huge proportion of the register – despite asking their brokers to arrange meetings.
We now think this lack of engagement is endemic and is a travesty. Shareholders must engage with both investment managers and Boards. Too often we hear that shareholders only engage with the former. How else can Boards know the will of their shareholders?
We have to acknowledge that calling for increased protections that require greater engagement with shareholders requires shareholders themselves to come to the party. Turnout rates for investment company AGM votes can be below 30%. If shareholders are to be afforded more protections via being asked to vote on more resolutions, then they should respect that privilege.
Returning to Bankers’ interesting resolution. There is a risk that the sector is doing too much to defend itself from investors such as Saba. Reactive changes to articles to deal with shareholders that might share Saba’s intentions looks too defensive.
This is very much a communication issue. We believe Boards can improve how they communicate with their shareholders (and would-be shareholders). A proposed change of this magnitude to the Articles should not be hidden away within the last resolution of 15 within a Notice to an AGM. In addition, resolution 15 contains a number of different changes to the articles, some of which arguably deserve their own separate vote. In fact, there are eight separate changes within that resolution. Further, why has the “substantial shareholder” been set at 20% (rather than 30%)? We could go on.
Moreover, the motivations and thinking behind the change should be clearly communicated. We consider ourselves investment trust geeks, and we completely missed this. It took a diligent industry participant to point it out to us. If we missed it, then we’d hazard a guess that most would have. Communications of this sort should also be conducted not just with current shareholders (who might or might not automatically receive the AGM Notice) in mind, but potential shareholders too. Again, the risk is that this could look like an attempt to sneak something through. We don’t doubt that the Board’s motivation in Bankers’ case is anything other than motivated by a desire to protect shareholders, but an opportunity is being missed.
Indeed, in surfacing these proposed changes, our view that votes be held on ALL manager changes, might turn out to be shared by many – to the further betterment of shareholder protections.
We also suggest that Boards, where the portfolios are liquid enough, should offer shareholders their money back at NAV less costs whenever a manager change is proposed. When Keystone changed their investment policy and manager to Baillie Gifford, they held a vote, but no exit at NAV less costs was offered.
To those who state that this may be existential for a trust….. well, isn’t that the point? We need Boards to be justifying why their trusts are relevant. Presumably shareholders approving of a manager change wouldn’t want an exit.
In conclusion, we suggest the following:
- All Articles should be amended to give independent shareholders a vote whenever there is a manager change (not just when the manager is a related party to a large shareholder).
- Where the portfolio is liquid enough, shareholders should be offered an exit at NAV less costs whenever a manager change is proposed.
- Single resolutions that bundle many different changes should be discouraged in favour of separate resolutions unbundling key changes.
- Whenever Boards suggest changes to Articles via resolutions at general meetings, the rationale for doing so, the motivations and the timing of the decision should be clearly explained. This could be done by a written document, or ideally via webinars, where jargon could be minimised and explained. Think not just of the current shareholder, but the future one too.
Ben Conway – Head of Fund Management
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