boards will not need independent senior directors as envisaged in corporate governance code
Investment trusts can ignore key sections of a government review into UK corporate governance, including recommendations on the inclusion of independent senior directors to boards.
The Combined Code on corporate governance, released by the Financial Reporting Council last week, includes concessions for investment trusts.
The code grew out of the Higgs Review of corporate governance, first released in draft form in January, and includes measures intended to ensure board independence.
These include provisions for at least half the board members to be independent, non-executive directors, with one appointed as senior independent director. Directors that have worked for the company within the past five years or been a senior employee with a company that has had a material relationship with the company within three years would not be considered independent.
This could have hampered trust management firms from placing their own staff as directors on boards of trusts they manage. However the FRC noted investment companies typically have a different board structure to other companies and therefore some provisions of the code are not relevant to them.
As the code is voluntary, trusts may also pick and choose which parts of the code to follow, but must explain any divergence in their annual report if they are to claim compliance with it.
The code was formulated at the behest of the Government to shore up the quality of corporate governance in the wake of a series of company collapses during the equity bear market.
AITC director Daniel Godfrey said the provisions on senior independent directors will not apply to investment trusts.
'Not all the provisions apply to investment companies. I think most trusts would choose not to have a senior independent director,' he said.
Godfrey added the provision declaring directors who had served on the board for more than nine years as no longer independent was an improvement on the draft proposal of six years. The AITC last week also brought out its own code of corporate governance, designed to cover areas of the investment trust market missed out by the Higgs review.
This AITC code proscribes the chairman of an investment trust being an employee or former employee of the management company or a professional adviser to the manager.
The code suggests the board regularly reviews both the performance and contract of the manager, although it states the long-term advantages of investing in closed-end structures make frequent management changes undesirable.
It also lays down guidelines for board scrutiny of trust management, stressing the importance of regular reviews of share price and net asset performance, gearing, asset allocation, investor relations and overall strategy.
Main features of corporate governance code
• At least half the board in larger listed companies to be independent non-executive directors, with a definition of independence of non-executive directors;
• Separation of the roles of the chairman and the chief executive to be reinforced;
• A chief executive should not go on to become chairman of the same company;
• More open and rigorous procedures for the appointment of directors and from a wider pool of candidates;
• Formal evaluation of the performance of boards, committees and individual directors, more professional development of non-executive directors;
• Closer relationships between the chairman, the senior independent director, non-executive directors and major shareholders; and
• Strengthened role for the audit committee in monitoring the integrity of the company's financial reporting, reinforcing the independence of the external auditor and reviewing the management of financial and other risks.
Source: Financial Reporting Council
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