Seven employees, including James Ogilvy, the new chairman of Foreign & Colonial, will step down as non-executive directors of eight investment trusts run by the fund manager. No employee will be allowed to serve on an investment trust board while running its funds.
Andrew Barker, a senior fund manager, will step down from the Foreign & Colonial Investment Trust, the pounds 2.5bn flagship of which Kenneth Clarke, the former chancellor, is a director.
In an unusual move, F&C also said it would let investment trusts cut F&C's contract as fund manager from two years to one, without any compensation.
Robert Jenkins, who joined the fund manager as chief executive last month, said: "The initiative we announced today goes above and beyond what is currently considered best practice in the industry.
"The essence of the issue is the perception of a conflict [of interest] and the perception of potential wrongdoing that arises from dual responsibilities. We are doing absolutely everything that could possibly be done within the limits of Foreign & Colonial's management."
F&C, which manages pounds 4.5bn in client investment trusts, has been under attack for months from shareholders such as Hermes. Shareholders questioned whether a director could be impartial in judging the performance of a fund manager while also being an employee.
The battle came to a head last month when Hermes, the pension fund, and City of London, a fellow shareholder, voted to oust the entire board of Brazit, the Brazilian Smaller Companies Investment Trust, run by Foreign & Colonial.
The board included F&C's former chairman, Michael Hart, who was replaced by Mr Ogilvy in January. Mr Hart now heads up the Association of Investment Trust Companies.
Shareholders of investment trusts were also concerned that fund managers often had two-year contracts, allowing them to claim compensation if they were ditched for performing badly.
The City yesterday welcomed the move as a big step forward in efforts to clean up the investment trust industry and called on others to follow. Shares in investment trusts run by F&C were all marked up by around 2 per cent each.