Can investor interests be aligned with the business objectives of a fund provider? Noel Ford, an independent director, says they should be – and looks beyond compliance to the distribution issues for fund boards.
A leading European regulator, while acknowledging the ‘tsunami’ of regulation since the global financial crisis, recently commented that boardroom activity in the funds industry has been consumed with addressing flaws in corporate and regulatory compliance.
This regulatory tsunami followed many criticisms from regulators and investors during the financial crisis about the competence of board directors. There was the perception that a breach of trust had occurred between fund providers and their clients.
Enhanced board governance and transparency can obviously help repair this breach of trust – but many also view the raising of assets through international distribution as being a significant enabler of this repair, too.
It is simply not enough to have good board governance: the business of the fund provider must also advance.
The complexity of regulatory compliance – and the material increase in the cost of doing business because of it – has to be balanced with the business need for product development across multiple markets to attract new assets.
The expertise required at board level to achieve this may be best attained with multi-disciplinary and internationally diversified boards.
WIDER SKILL SETS
Management and oversight of effective cross-border distribution would require international insight at board level into different market practices and regulatory frameworks.
Several studies have indicated that investors – particularly institutional investors – have developed a positive view about board diversity and it would appear to be a simple enough conclusion that the boardroom should possess a fuller set of skills, not only to be regulatory compliant, but to drive business.
I hosted a focus group at a Global Alternative Investment Management (GAIM) conference in June and it was interesting to note several recurring themes aired by an international audience.
One was that new products are harder to develop (which has consequences for capital flows and investor interests). Another theme was the ability of fund directors to understand distribution strategy in multiple markets, and it was considered that they often did not fully understand this activity.
Many boards are resistant to change, even where they see the benefits of aligning the board focus on distribution with investor interests. Unfortunately, this aversion may ultimately be negative for achieving the strategic objectives of the business.
I would offer that it is useful to consider what the new and emerging expectations are of regulators and the investing public in this area.
Fund boards that resist changing to align themselves with market, regulatory and investor expectations may see assets move to those businesses that meet the due diligence criteria of institutional and informed retail investors.
Several contributors to the GAIM focus group noted the need for a weighted programme to assist the transition towards an international board construct.
The measures noted as being conductive to aligning board function with the expectations of regulators and investors included a stronger governance and oversight infrastructure. This might entail a defined process for board appointments that considers required skill sets – both unique and complimentary.
The GAIM group felt that a diversified board would reflect the real world (including the fact that clients are themselves a diverse set of people); it would spark informed debate leading to better decisions and innovative solutions, while a broader talent pool with a wider skill set would make companies more adaptable to changing demands.
DISTRIBUTION: THE LIFEBLOOD OF A FUND
What about the challenges of product development, opening up new markets and raising assets?
I want to challenge the concentration of boards as being too focused on regulatory compliance and not focused enough on achieving the strategic aims of the business, meaning they are failing to deliver enhanced value to investors.
For many directors in the funds industry, distribution is often seen as a far country. Unless the board has an in-depth expertise in the area, it may be at a disadvantage in understanding the logistics of distribution. This often leads to less than insightful board reports and informed challenge.
Thoughts from the GAIM session included that directors should:
- Ensure distribution strategies are stated in public documents, such as the prospectus.
- Understand, approve and measure objectives, while also realising there are differences in investor demand and customer experience across the world.
- Realise that distribution strategy needs to be flexible to take advantage of opportunities.
- Understand distribution channels and issues with registration, private placement and the possible risk exposures of reverse solicitation.
Also, directors need to rationalise what is working in distribution and amend plans and targets as required. Directors can only safely do this if they understand the function at a granular level.
It is worth noting some of the findings from the 2013 McKinsey survey ‘Does the board understand the industry dynamic well enough?’ When steps are taken to structure an international and diversified board, inherent values include more time spent on strategic board matters and stronger incentives for directors to create shareholder value.
But an objective observer could reasonably question the need for an alignment between regulators, fund promoters and investors.
One of the focus group contributors offered the view ‘if it’s not broken, don’t fix it’. The reality may be that regulators and investors have formed a view that there is a break that requires a fix.
This point may be evidenced in the tsunami of regulation and the increased use of investor due diligence initiatives. It might well be, as another contributor to the focus group said, “the restoring of investor trust in the market and in market participants has a long way to go”.
The broader skill sets of an internationally diversified board must be matched to the maturity cycle of the fund.
The focus of the board can only be enhanced if there is a ‘renewal’ process that gains fresh and informed inputs, the broad consensus being that this would be in the investor’s interests.
In this context, the importance of distribution and the assessing of new assets via appropriate and regulatory compliance channels takes on a new importance. Increasingly, the industry has observed a growing investor awareness of distribution reflected in due diligence questionnaires from a variety of sources.
Perhaps an international board offers a greater range of practical talents and an understanding of cultural aspects of new markets before the decision is taken to deploy resources in a product launch and registration process.
Noel Ford is principal at Governance Ireland and an independent fund director
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