Fund directors are spending more time in board meetings as corporate governance levels across Luxembourg funds increase, finds Nick Fitzpatrick
Fund board members in Luxembourg spend longer preparing for and attending board meetings than they did two years ago. The finding, by business consultancy PwC, suggests that fund governance has become a much more serious issue in Luxembourg following the financial crisis and the Bernard Madoff scandal.
The EU’s measures to increase corporate governance for listed companies – which some of Luxembourg’s ‘Sicav’ funds are – may partly lie behind this trend. So will the code of conduct drawn up for fund boards by the Luxembourg fund association, Alfi. The code was released post-crisis and aims to increase standards in fund governance for all types of funds domiciled in the country.
But another impetus comes from the investors themselves, who these days, are likely to be more nervous, better educated and less trusting of investment houses.
“We are seeing RFPs asking about fund governance, which is new,” says Jon Griffin, managing director at JP Morgan Asset Management (JPMAM) in Luxembourg.
Luxembourg’s next top model
The increased time spent over board meetings suggests governance standards are increasing. But PwC’s research also reveals a divergence in the way firms execute their fund governance. It rests on whether they appoint independent directors or not.
Didier Prime, partner and asset management leader at PwC, says: “More and more asset managers are appointing external board members.
“This is a trend led by Anglo-Saxon managers and is found less among continental asset managers.”
The Alfi code of conduct is agnostic on questions of structure, such as the status of board directors.
A board of independent directors may intuitively seem better for protecting investor interests but, as Tom Weiland, director of legal and regulatory analysis at RBC Dexia Investor Services, who was part of the Alfi committee that drew up the code, says: “You can be an independent director, but not necessarily a competent one.”
The divergence in thinking between Anglo-Saxon and continental fund managers about external directors is well- illustrated by two Luxembourg heavyweights – JPMAM and France’s BNP Paribas Investment Partners (BNPPIP).
JPMAM has moved over time towards using more external directors. The board of its main Ucits funds has five external directors and two internal directors who are senior managers within the firm.
“A couple of years ago two additional external board members were added following a traditional recruitment search process. Both are professors of finance from Holland.”
Griffin explains that JPMAM has three boards whose composition reflects the experience needed for the fund type. “For example, we have a private equity fund and have ensured that we have external directors with private equity experience on the board,” he says.
JPMAM has eleven Sicav funds in Luxembourg, which incorporate around 180 underlying sub-funds.
“The main board meets quarterly in Luxembourg. It’s very serious, taking place over two days. They pay a lot of scrutiny to any new product, such as its documentation and understanding its risk controls. The board also reviews the operations of the company and ultimately has the power to fire the management company and the custodian if they are dissatisfied with results.”
Strong management companies
BNPPIP in Luxembourg has €100bn in assets under management in the country. Stephane Brunet, its CEO, feels the backbone of good governance structure lies in the management company and prefers to source directors internally.
“Our fund board is made up of internal directors. The directors are the same people who also control the management company. The responsibility for the fund rests with the board, but behind the board lies the management company.
“Having external directors is no guarantee. I prefer to have 15 people working on the Nav every day, rather than having one external director,” he says.
The French firm has a large management company for its Ucits fund range and a smaller team overseeing its more lightly regulated Sif and fund of hedge funds.
“We split them in order to manage the reputational risk. If the regulator were to ask questions about our hedge fund, we would not want Parvest to be affected,” he says. Parvest is BNPPIP’s flagship Luxembourg Ucits fund.
Simlarly Giorgio Gretter, the head of Amundi Luxembourg, says governance focuses on the management company. “Our board of directors for Amundi Luxembourg has seven people sourced from Paris. These include the head of risk and two people from retail and institutional sales. We have four business units in Amundi and all are represented on the board.”
In principle, it shouldn’t matter whether board members are sourced internally or from the outside world. “Whether the board is sourced internally or externally, they have to put themselves in the mindset that they now answer to investors,” says Griffin.
But it isn’t necessarily so easy for an independent director to do this just because they are not employed by the fund management company behind the fund.
Jean-Michel Loehr, chief of industry and government relations at RBC Dexia IS, says: “Independent directors may not be so independent if they only have two or three mandates.
“Each mandate must remunerate you enough to let you make a decent living. Being independent and then financially dependent on two mandates is a contradiction. Directors should be able to threaten to leave and have the freedom to disagree.”
He adds external directors are gaining in importance, and believes that they are not paid excessively.
It’s worth noting that the two most recently appointed independent directors at JPMAM will have income from academic institutions.
But what about the pool of professional directors that exists? What do they need to achieve financial independence from the funds that pay them?
“It would not be unusual for an independent director to work for ten large clients, with each client having three or four entities,” says Prime at PwC.
The divide, in practice, between Anglo-Saxon and continental managers would make it a challenge for such body as Alfi or the Ila – the Luxemburg Institute of Directors – to advocate one model of fund governance over another, particularly where the status of directors is concerned.
But Weiland and Loehr at RBC Dexia believe the issue of independent directors is not the best criterion anyway, and that a fund governance framework with a balance and diversity of skills and personalities is more important.
Loehr says: “The principles-based approach is well-adapted to the landscape. A more quantitative approach can push you into corners not adapted to a situation.”
He says an ideal model for fund governance would be centred on transparency and clear rules that are understood by everyone. Giving board members specific responsibilities is a good thing, and so too would dedicated audit, compliance and pricing committees. But the model needs diversity.
Laws and guidelines
Comparing the situation with the US, Mike Flynn, director of the regulatory consulting division at Deloitte, says: “Another point of view is to have a minimum weighting of independent directors which for 1940’s act funds is set at 40%. ICI [the Investment Company Institute] in the US observes that 88% of investment funds boards have more than 75% independent membership.” There are also ICI guidelines on tenure and age of board members.
Where the Alfi code could trip up a fund company is where the code calls for an appropriate risk management process.
This is because Alfi intends the code to be adopted by all types of funds in Luxembourg, so Flynn points out that for lighter regulated Sifs there is less legislation around risk management.
“If they sign up to code of conduct, then it becomes a topic for the Sif board.”
Similarly, Michael Delano, a PwC partner, says: “The code of conduct is a high-level document. When boards started going through it, it made them focus more on what they were doing operationally. We are seeing more and more boards picking up the code.”
PwC will unveil more findings of its Fund Governance Survey of board directors in March at an Ila meeting.
The findings will show that preparation time for meetings is six to eight hours for each director and that the average time of a board meeting is three hours.
©2011 funds europe