Stewards of shareholder capital


By P. Gerald Malone, Independent Chairman of several Aberdeen Closed-End Funds


Unlike directors of many commercial ventures, independent directors of closed- end investment companies have a tightly written script to follow as they carry out their duties. The U.S. Congress recognized the risks of structure where the interests of shareholders and a typical "externalized" management structure with the enactment of the Investment Company Act of 1940. An externalized management structure is one in which investment management and other services are provided by one or more entities whose own interests might conflict with the fund's mandates.


Representing shareholder interests How to resolve this conundrum? A “1940 Act” registered investment company is required to have a significant proportion


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of independent directors who monitor carefully the relationship of a fund with its investment adviser and other service providers. So, more than the defender of shareholders’ interests, independent directors are custodians of the public interest; quite a burden of responsibility for a role often depicted by ill-informed observers as a sinecure. But, do independent directors have


“teeth?” The sharpest in the set is the annual “15c” review – required by the “1940 Act.” This is a review of the adviser’s contract, when all aspects of management functions come under scrutiny in closed independent session with management left fretting in the corridor outside the board meeting. It’s an in-depth review, principally of the nature, extent and


quality of services, investment performance, expenses, economies of scale, ancillary benefits a manager may receive and the performance of subcontracted advisers. This is no mere formality. Each year managers have to clear the hurdle of shareholder interest to remain in office. Are independent directors truly “independent?” Every year a 42-page questionnaire is filed which examines in minute detail the relationship between director and manager and would identify any commercial or personal relationship that posed a potential conflict of interest with shareholders. If independent directors restricted their


role to playing attack dog for “1940 Act” enforcers, they would be delivering poor


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