Will AFM independent directors make a difference? We look at a recent case study
The deadline for authorised fund managers (AFMs) to appoint independent directors is just over four months away on 30th September 2019. In order to balance the interests of AFM investors and shareholders the FCA, in April 2018, implemented its proposal that all AFM boards should have a minimum of 25% independents.
The recent spat over Woodford Investment Management’s transfer of £73m of unquoted assets from Woodford Equity Income Fund (WEIF) to Woodford Patient Capital Trust (WPCT) makes an interesting case study. WEIF was a ‘forced’ seller in the sense that it needed to reduce its unquoted holdings to stay within the rules. The deal was done at ‘fair value’, but sweetened for WPCT shareholders because WEIF paid 100% of nav for the WPCT shares they received in return for the assets as opposed to the approximately 20% discount in the market.
WEIF, as an authorised open-ended investment company (ie. analogous to a fund but a corporate structure) is controlled by an authorised corporate director (ACD), Link Fund Solutions Limited, which receives a fee of up to 1% per annum for administering the company. The ACD has six Directors, of which only one is non-executive and potentially independent. WPCT is an investment trust falling under the usual corporate rules. It has six independent directors.
Both WEIF and WPCT’s investments are managed by Woodford IM, so the potential for a conflict of interest is clear. Shareholders of both companies were concerned by the deal. WEIF shareholders were worried that they were investing in WPCT shares at 20% higher price than they needed. WPCT shareholders thought they might be being stuffed with stale WEIF assets at high prices.
Our point here is not that the deal was bad for either company or that Woodford IM has behaved in any improper way. The price may indeed have been a fair one, and the deal good for both WEIF and WPCT. Our point is that neither company were able to provide shareholders with any real assurance that their Directors had looked after their interests.
After being pushed, WPCT’s chairman commented that “The Board sought advice from a range of parties and had the companies, which we already own and know well, independently valued.’ The ACD made no comment to WEIF shareholders but Woodford IM commented ‘The potential conflicts of interest have been thoroughly assessed and managed in terms of both sets of shareholders, not just by Woodford, but by all parties involved in the transaction.’ At Linchpin, we don’t think either of those comments add to anything more than unverifiable assurances. They are not good enough.
The question then arises whether independent Directors in place at WEIF or Woodford IM would have made any difference to WEIF shareholders. On the evidence of WPCT, they might still have been fobbed off with a bland assurance. But independent directors would at least bear some accountability for protecting shareholder interests and could be questioned at AGMs. We view that as an improvement.
One final comment: we are aware that some AFMs are simply going to past executives to fill the new positions. We rather doubt that they will be perceived as truly independent. The need above all is for someone who can bridge the gap between investment and governance but with an independent mindset. We can think of people who fit that description well. To find out more, please click here.