The heated debate on governance

Governance manifests in several ways within asset management – but however it manifests, governance is a crucial issue if the industry’s economic usefulness is to be realised and respected.

In February, Aviva Investors said it would lower the fees on five investment funds – and the move gave UK regulators reason to celebrate. The price change, which saw a several percentage-point drop in fees on certain passive and active products, is evidence that the latest regulatory measure on governance in the asset management industry will work to the advantage of customers.

However, if the firm sees higher inflows or simply gets a good press over its higher standard of fund governance, there’s no reason why Aviva Investors wouldn’t celebrate, too.

The firm’s decision to lower fees came about as a result of the Financial Conduct Authority’s (FCA) ‘Assessment of Value’ regime, which is centred on the governance of investment funds by fund boards. Assessment of Value requires boards to take a view on whether the funds they govern are providing value for end-clients based on criteria such as whether advantages from economies of scale are being shared with fund investors, whether the fund’s performance is delivering what it ought to – and, of course, whether the fee is appropriate. 

Aviva Investors was one of the first asset management companies to produce an Assessment of Value report, which it published as part of the firm’s wider annual reporting on its UK fund range.

If a word cloud of asset management keywords was produced, ‘governance’ would be written large. Quite possibly governance is the most pertinent topic for the industry, certainly within the ambit of regulation and business operations. A series of failures of governance was one of the fundamental reasons for the financial crisis and although regulators focused their governance regimes primarily on the banks, other financial firms have been swept up in the regulatory wake.

Governance affects asset managers on multiple fronts. As well as fund governance – a topic that has manifested at the European level within the likes of MiFID II and PRIIPS over the past decade, and now in the FCA’s Assessment of Value initiative in the UK – the governance issue also speaks to how asset managers themselves play a corporate governance role in the companies they invest in.

The Funds Europe/CACEIS governance survey aims to deliver a snapshot of fund professionals’ attitudes towards both fund governance and corporate governance. We begin with questions about fund governance, broaden into topics of diversity within wider asset management organisations (a very zeitgeisty governance topic), and also consider shareholder governance.

Above all, it’s about investors
It is perfectly reasonable to criticise the framework for investment fund governance by their boards. So many boards of European-domiciled, cross-border funds are comprised of members from the sponsoring fund management company – often entirely so. This leaves boards exposed to criticism of decision-making processes. Whose interests is it that are being served? The investors’ or the asset management company’s?

Even where cross-border funds do have independent directors, these directors are sometimes sourced from a fund’s service providers.

In a Funds Europe article looking at governance of Luxembourg UCITS funds, we found a number of lawyers sitting as independent directors on funds to which the lawyers’ firms provided legal services (‘High moral fibre’, Funds Europe Luxembourg Report, 2016). It is not to say such individuals cannot manage this conflict of interest, of course. In fact one lawyer, in reference to the comprehensive knowledge of a fund that an independent director needs (and may have to spend many hours gaining), pointedly said: “We could be seen as less independent than, for example, a retired auditor for whom the directorship is their main occupation. But I would not accept the mandate of a board where I am not also the legal adviser, because I would want to know the fund well that I am sitting on.”

Another lawyer said he would pass the duty of legal advice for the fund whose board he sat on to another lawyer within the firm, to provide some separation of interests.

The direction of travel within the funds industry is for more independent directors; board members sourced from service providers are probably not what regulators have in mind, even if this conflict can be managed. 

A widely held notion of the role of the independent director is that they will better represent client interests than in-house directors and therefore balance out the power of the fund board’s corporate members with those of the end-clients. 

In the words of America’s Securities & Exchange Commission, the fundamental role of the independent fund director is expressed in these questions: Are independent directors really effective? Do they – and can they – really act as a check on management? And thirdly, are they serving the shareholders’ interests above all else?

The Assessment of Value regime does emphasise the role of independent non-executive directors – yet our survey results suggest doubts among investment professionals that the hoped-for worthy aims will be achieved.

© 2020 funds europe



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