Company directors are expected to be independently minded, so differences of opinion within boardrooms are to be welcomed. But recently at Scottish Mortgage Investment Trust (SMT), a heated argument about capabilities and governance boiled over. As a result, half of its directors ended up leaving.
In mid-March, Amar Bhidé, a director since 2020, accused his fellow directors of being lured into complacency by the trust’s meteoric rise in share price before 2021. In 2022, the net asset value (NAV) fell, the discount widened and the share price almost halved as higher interest rates blew off the speculative froth from technology stocks. The six directors were all academics, accountants or management consultants. They have to rely on valuations by Baillie Gifford, which manages the trust and makes the day-to-day investment decisions. Bhidé was adamant that the criteria for new directors should include professional investment experience. He said that the trust’s borrowings gear in volatility. Debt had enabled more to be invested in unquoted private companies, but they had now reached saturation point (30 per cent of the trust’s investments), and he doubted that the share price would bounce back. He urged the board to realise that a large discount to NAV would be a permanent feature, and that past buybacks had been badly managed. They needed to change the policy.
The other directors disagreed. In their view, they should challenge Baillie Gifford on risk exposures and its adherence to the agreed strategy, but not try to micro-manage its investment decisions or second-guess the market. Bizarrely, Bhidé then thought he’d been made to resign. The board denied this. A few days later, he officially resigned, and so did the two female directors, including Fiona McBain who has chaired the group since 2017. That leaves just three (all males) from the original six. The last Scottish Mortgage annual report described Bhidé as a distinguished academic at the private Tufts University in Massachusetts. Funnily enough he also holds a role at the Fletcher School of Lawand Diplomacy.
The spat at RBG (RBGP) also came as a bolt from the blue. On 31 January, the legal services group baldly announced that: “The board has lost confidence in its chief executive, Nicola Foulston, as a result of cultural concerns and the execution of the group’s strategy; her employment contract has been terminated with immediate effect.” Wow! No thanks for her past efforts. None of the normal euphemisms about leaving to pursue business interests elsewhere. This was brutal. The announcement came with a trading update that implied top-line results for 2022 would be in line with consensus market expectations. Profit before tax was not mentioned, and the shares slumped.
RBG’s 2021 annual report had described Foulston as having “one of the sharpest minds in the business”. In her 20s, she transformed her father’s four race tracks (Brands Hatch Leisure Group) that had been run as a glorified car enthusiasts’ club into an expanding, well-financed business, and sold it about 10 years later for £120mn. She became chief executive of Rosenblatt in 2016, floated it on Aim in 2018, and diversified the group into broader legal services (Rosenblatt and Memery Crystal), corporate finance (Convex) and litigation finance (Lionfish). “She has a reputation,” the annual report said “for reliability, trustworthiness and delivering on time”. Ruthlessly efficient, then. As the face of RBG for investors, she had been impressive. What went wrong?
Part of RBG’s stated strategy was to reduce “overall volatility of earnings and the impact of any losses from any one business”, but in December it announced that Lionfish had lost two cases with a hit of £4mn. There was a strong hint that the subsidiary was to be sold or wound down. Foulston showed confidence by buying more shares to increase her stake to 12.5 per cent. But could there be more losses in the pipeline? Shareholders will have to wait for the earnings release on 26 April to find out, and longer still to see whether the new management can win the same sort of trust and rapport with investors that Foulston achieved.
Three new executive directors have been elected, and in February a messy employment tribunal case emerged. At the preliminary hearing, the sacked head of employment claimed unfair dismissal, based on racism, victimisation and harassment. He in turn is accused of anti-semitism. Foulston admitted once using a racist term to describe a non-racist situation. Could that be the “cultural concern” mentioned in her sacking? Tribunals are time-consuming and damage reputations, so why no negotiated settlement?
At Scottish Mortgage, Bhidé agitated for change that other directors thought inappropriate. At RBG, it seems that an abrasive culture (in which Foulston was more than capable of holding her own) bit back. In both cases, you have to wonder why the differences couldn’t have been more swiftly resolved
