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Directors shelter from the split-cap storm

When Chris Fishwick finally buckled under intense pressure and resigned from Aberdeen Asset Management last year, there was widespread – but muted – applause.

After a year in which 19 split-caps were either suspended or slid into receivership, the loss of the man often dubbed the architect of the sector as Aberdeen&#39s head of investment trusts came as little surprise.

But those who thought his resignation would trigger other departures have been sorely disappointed. Only brokers such as Brewin Dolphin, which helped design and market splits, have come under fire but it has set aside just £2.5m for compensation. Clearly, it does not expect to shoulder much blame.

But it is not alone. Little has been said about the role in the crisis of non-executive directors. Charged with ensuring the sound management of trusts, they hardly covered themselves with glory as many splits collapsed and investors lost most of their money.

Michael Philips proprietor Michael Both says: “The directors seemed to be making statements at odds with what was clearly going on. All they do is go to lunch, take their directorship fees and say the fund manager is taking care of everything for them. But they should be ensuring the right thing is being done.”

Both gives the example of Aberdeen, which geared at least one trust to more than 90 per cent. Despite the obvious risks, he says the directors simply failed to act, believing the manager was acting correctly. Allied to the fact that one of his clients, who was in a safe trust that was due to wind up, was approached by Aberdeen and advised to switch into a much riskier split and Both concludes that the fund manager and directors are both guilty of acting irresponsibly.

In fact, many in the industry are angry that these directors have got away scot-free when they are arguably almost as culpable for the crisis as the managers who invested in other splits and geared their trusts to the hilt.

A senior industry source says: “I have met a number of directors who did not know what was going on and said they had no idea of the scale of the level of cross-holdings and gearing. In any other plc, directors would be held to account. It is completely unacceptable.”

The main reasons, according to the source, for the lack of action of such directors are complacency, the fact that many are not qualified to understand the issues and that they too often naively rely on “slick” managers and advisers. For the situation to improve, there is widespread support for bolstering corporate governance rules to draw a line under the debacle.

Bates Investment Services head of research James Dalby says: “The good thing about what has happened is that it has highlighted the need for a strengthened framework. In particular, I think directors&#39 roles need to be re-engineered, especially in terms of the effort that is put into them. It can&#39t be allowed to happen again.”

Dalby wants to see tighter rules so that one of the principal reasons for the situation spiralling out of control – that everyone took a rising stockmarket for granted – never again results in reckless products being designed and marketed.

He may not have to wait long. The AITC is producing a draft corporate governance code on which it intends to consult at its directors&#39 conference next month. If the code is approved, it is likely to be rubber-stamped and distributed to the AITC&#39s membership sooner rather than later.

The problem, however, is that it would probably be voluntary and unlikely to address the issue of the role of directors per se as the AITC believes there is no case to answer.

Director-general Daniel Godfrey says: “Given that neither the fund managers, the brokers nor anyone else really clocked the fact that zeros were as vulnerable as they turned out to be, it is unfair to blame the directors. They had no expertise to see something that the experts did not see themselves.”

Godfrey does admit that some of the product structures were “stretched” but says their designers were not unreasonable in taking an optimistic line on their future performance.

He also points out that directors are often not privy to design, so that they have little influence over structure. Despite this, however, the AITC is looking at the feasibility of bringing boards into the process earlier and giving them the opportunity to seek an independent appraisal on their trusts&#39 proposed structure. Neither measure would be part of the AITC&#39s code but, again, they are likely to be voluntary.

For their part, some of the fund managers of the splits which have collapsed question what more the directors could do. Exeter Fund Managers director Ian Joliffe says: “Bank borrowing was the problem, which is the manager&#39s decision. If a manager expresses the view that markets are going up – and they were – then should directors argue? Most are very bright and do a good job.”

However, iimia chief investment officer Nick Greenwood says the quality of boards “varies massively” from trust to trust – the legacy of many splits being rushed out at the apex of the bull market. There perhaps lies the real truth. When times were that good, no one could see it ending, which meant controls were not as rigorously applied as they should have been.

Some directors are, at the very least, complicit but with brokers and managers under the spotlight, they are unlikely to face the criticism they deserve.


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