6 CORPORATE GOVERNANCE GUIDELINES FOR INVESTMENT TRUSTS

Introduction
6.1 The AITC Code, the Listing Rules and the Combined Code
6.2 The basis for the AITC Code
6.3 The Principles of the AITC Code
Contacts

Introduction

The new Association of Investment Trust Companies ("AITC") Code aims to provide the boards of investment trusts and closed-ended funds with a framework of best practice as there are a number of additional factors that apply to these companies that require an alternative approach to that set out in the Combined Code. The AITC Code is intended to be a comprehensive guide to best practice for these companies and as such will overlap in many areas of the Combined Code.

The AITC Code is based on "principles" rather than "rules". The recommendations recognise that different companies and their boards will have different "right" approaches to most issues depending on the individual circumstances of the company. With this in mind the AITC Code follows the Combined Code's approach of requiring its members to state whether they are adhering to the principles in the Code and if not to explain why and/or the detailed steps they intend to take to bring themselves into line in future.

6.1 The AITC Code, the Listing Rules and the Combined Code
The Financial Services Authority (the "FSA") has outlined a number of legislative changes it will make to the Listing Rules, Model Code and Code of Business Rules (see paragraph 7 below). The AITC has welcomed the changes. It has also previously stated that if the final changes to the Listing Rules continue to vary from the AITC Code then the principles which are outside the rules will be changed accordingly.

The AITC Code also states that the only current areas of variance between the Combined Code and the recommendations of the Higgs Review with the AITC Code would be ones where the AITC Code gives greater flexibility to boards. Where the variances are in the final version of the Combined Code produced in July, the board of a company can choose to either follow the Combined Code or the AITC Code and explain that, although on a particular issue there is a variance with the Combined Code, they are following the AITC Code.

6.2 The basis for the AITC Code
The AITC Code sets out twenty one principles in relation to three areas: the board, board meetings and the relationship with the manager and shareholder communications. In similar fashion to the Combined Code the AITC Code expands on each of the principles with detailed recommendations.

To explain the basis behind the twenty one principles, the Code identifies what investment company shareholders want, including:

1. the best possible share price return for an acceptable level of risk consistent with the objectives of the Company and good liquidity so that they can sell shares easily; and
2. good communication from the board and portfolio managers and clear investment policies.

The Code then focuses on how the board can deliver these objectives. It states, amongst other things, that boards should bear the ultimate responsibility to shareholders at all times and monitor and respond to shareholder opinion whilst ensuring that effective shareholder communications are established. Boards should also maintain proper internal controls and objective monitoring of the company structure, decisions and fund manager.
Through identifying what shareholders want and how boards can meet their objectives; the Code arrives at four fundamental guidelines that provide a context for the twenty one principles. These are that directors:

1. must put the interest of shareholders first;
2. must treat all shareholders fairly;
3. should be prepared to resign or take steps that could lead to a loss of office at any time in the interests of long term shareholder value; and
4. should ensure that they address all issues relevant and that disclosures are made in a way those non-financial shareholders can understand.

6.3 The Principles of the AITC Code
The principles in relation to the board focus on maintaining the board's independence from the fund manager. Following on from this the independent directors should take the lead in the appointment of new directors and directors should be elected for a fixed term of no more than 3 years.

Further principles in relation to the board include that there should be full disclosure of information about the board, the board should be balanced in terms of skills, experience, age and length of service, whilst directors' remuneration should reflect their duties and responsibilities and the value of their time spent.

The principles in relation to board meetings and the relationship with the manager state that the primary focus at regular board meetings should be a review of investment performance with the board giving attention to overall strategy. Additionally, the board should regularly review both performance and the contractual arrangements with the manager and monitor and evaluate other service providers. The board should agree policies with the manager covering key operational issues.

The principles aimed at encouraging shareholder communications include that the board should put in place a system for canvassing shareholder views and for communicating the board's views to shareholders. The board should disclose the matters over which the manager has discretion and the areas of decision making that are exclusively reserved for the board. The board should also ensure that shareholders are provided with sufficient information for them to understand the risk to reward balance to which they are exposed by holding the shares.

The Code also provides guidance for boards in implementing the provisions of the Turnbull Report on internal controls and contains details of firms, which provide independent director search services.

A copy of the Corporate Governance guidelines for Investment Trusts is available at: www.aitc.co.uk.

Contacts
If you require further information on any matter covered in this note, please contact your principal contact at Charles Russell or Simon Gilbert, Katy Knight, Clive Hopewell or Alexander Keepin (London), Francis Rundall or Richard Norton (Cheltenham) or Geoff Sparks (Guildford) and on 0207 203 5000.

Please note that the summaries above are a general indicative guide only. They are not exhaustive. This information has been prepared by the firm as a service to our clients. As it is a general guide, we recommend that you seek professional advice before taking action. No liability can be accepted by the firm for any action taken or not taken as a result of this information. The firm is not authorised under the Financial Services and Markets Act 2000 but we are able in certain circumstances to offer a limited range of investment services to clients because we are members of the Law Society. We can provide these investment services if they are an incidental part of the professional services we have been engaged to provide.