Patient Capital chairwoman Susan Searle is non-executive chairwoman of Mercia Technologies, in which Woodford Investment Management holds a 24.7% stake. She is also non-executive director at Benchmark Holdings, where Woodford is the largest shareholder with a 22% stake.
The Times, which initially highlighted the apparent conflict of interest, reports Woodford Patient Capital holds a 0.8% and 0.46% stake in each company, respectively.
Scott Brown, the chief executive of Nexeon Limited, an unquoted company that accounts for 0.41% of the Patient Capital Trust, is also a director on the investment trust.
According to the UK Corporate Governance Code, the role of independent non-executive directors is to “constructively challenge and help develop proposals on strategy”.
Under the code, which is currently being reviewed, it is up to the board to determine whether a director is independent.
However, it says a director’s judgement could be affected if they are a partner, shareholder, director or senior employee of a firm with which the company has a material business relationship.
Conflict of interest
Tilney managing director Jason Hollands says the board of the Patient Capital Trust is meant to act in the interests of shareholders and scrutinise and evaluate the manager with the ultimate sanction of changing the manager.
“It is therefore easy to see why there are potential conflict of interests and why it is incumbent on the board to rigorously manage these and be as a transparent as possible,” Hollands says.
7IM senior portfolio manager Peter Sleep says a lot of boards in the UK are “pretty toothless”.
“Non execs are proposed and hired by management so their appointment is hardly arm’s length. As a shareholder I want somebody who will pressure the execs and make a pain of themselves. I am unlikely to get that if they are proposed by management.”
A Woodford spokesperson confirmed the board has the authority to dismiss him as fund manager as happens in other investment trusts. Earlier this month, the board of the Schroder UK Growth trust dumped the fund manager in favour of Baillie Gifford.
Finding the right talent
Architas investment director Adrian Lowcock says investment vehicles add a layer of complication when it comes to independent directors as they invest in so many other businesses.
“If you play devil’s advocate, if you want the expertise from the industry, you’re probably going to want expertise from people you think are good, who are therefore the type of people or companies you’d invest in.
“At the same time, the overriding function of the board is to have no conflicts. The board is there to represent shareholders’ interests.”
Hollands said it was not unusual for investment trusts’ independent directors sit on the boards of portfolio companies.
“The universe of non-execs at UK public companies is not an exhaustive list given the required experience, regulatory approval process and potential liabilities that go with such responsibilities.”
However, Lowcock says for large listed holdings that wouldn’t be such a problem, because the stake in the company would be inconsequential.
“The nature of the Patient Capital trust, which is in those start-up, fledging businesses, where Woodford does take big shareholdings, means you probably want more independence on it.”
Lowcock believes investors probably do not pay a huge amount of attention to investment trust boards as part of their investment process.
Woodford responds
A spokesperson from Woodford says: “When Woodford launched WPCT, it intentionally sought a board with extensive experience in the types of early-stage companies that the trust invests. They were also aware that by choosing such a board there might be situations where they invested in companies in which the directors were involved.
“Woodford have robust procedures in place to ensure they mitigate any potential conflicts – the most crucial one being that the board has no involvement in the investment process or the day-to-day investment decisions, which are made solely by Neil and his team.
“Also, in July 2016, two new non-executive directors, both with extensive and high level experience within the financial sector, and specifically within the investment trust sector, were appointed to board, complementing the existing non-executive directors of the company who hold a strong background in the development and growth of healthcare and technology businesses from early stage to maturity.”
