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AIC overturns nine-year cap on investment company chairs

7 February 2019

Investment company chairs will no longer have to step down after nine years on their boards, the Association of Investment Companies reveals.

Investment company chairs will no longer have to step down after nine years on their boards, the Association of Investment Companies has revealed.

In an unexpected victory, the trade body has persuaded the Financial Reporting Council (FRC) that investment companies are a special case and require more flexibility than normal businesses when determining the appropriate length of time that chairs can serve.

The FRC, the accountancy regulator that oversees the UK Corporate Governance Code, shocked investment companies in 2017 with a proposal that the nine-year limit on chairs should include any period they spent as a non-executive before taking lead of a board.

It has now agreed that investment company chairs can remain in post beyond nine years after they first join the board, provided a clear policy on tenure and succession has been published.

The FRC’s concession will help investment companies avoid a disruptive exodus of experienced chairs, although it may raise concerns the £153 billion sector is retreating on recent improvements in corporate governance and boardroom diversity that have helped shift its ‘old boy’ image a little.

Ian Sayers, AIC chief executive, welcomed the U-turn which he said would help investment companies recruit non-executive directors from outside the fund manager and financier base that has traditionally populated their boardrooms.

‘In the last five-to-ten years there have been lots of new entrants, which is good, but they don’t have investment company experience,’ said Sayers.

He said a rigid nine-year cap threatened to limit the amount of time an individual from outside the sector could chair a board to around five years, given they would need to spend a few years learning the ropes as a non-executive director.

‘If you bring in people from outside you need to give them time to learn to get up to speed,’ added Sayers.

Ultimately, Sayers said it would be up to shareholders to decide if they were ‘comfortable’ with chairs going on beyond nine years when they came up for annual re-election.

The FRC introduced the nine-year limit in order to ensure board chairs’ independence from the company that employed them was not compromised by long service.

‘What hasn’t gone way from this is for the need for board refreshment and succession planning,’ Sayers stated.

In another concession, the FRC agreed investment company chairs could also sit on their audit committees overseeing the auditor and production of their annual reports.

Sayers said this recognised that investment company boards of three-to-five non-execs are often around the third of the size of mainstream corporate boards and that banning the chair from involvement was impractical, particularly as any serious issue with investment valuations would be referred to the main board anyway.

Both exemptions have been published in the AIC updated 2019 Code of Corporate Governance.

The FRC meanwhile faces an uncertain future. A government-commissioned review by John Kingman, chair of insurer Legal & General, recommended in December that the watchdog be replaced by a more powerful, independent regulator. This follows a string of company collapses, such as BHS, Carillion and Patisserie Valerie, that have raised concerns about the quality of their audited accounts. 

Investment company news brought to you by Citywire Financial Publishers Limited.

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