The week began with a recap of some of the key findings from the recent Fund Boards Council (FBC) survey, which showed that fund managers and independent non-executive directors (iNEDs) are working hard to bring a sense of unity of purpose and to continue to drive improvement throughout the industry.
Value-added
One of the newly emerging themes that host Shiv Taneja, was most keen to highlight was the growing importance of funds defining their culture and purpose, most particularly in the new era of greater oversight and the introduction of the new assessment of value (AoV) regime.
“The success of AoV will be measured by the extent to which it has become business as usual within the organisation,” said Taneja, founder and CEO of the FBC. “That comes through very clearly in the study.”
The survey also revealed a growing interest among iNEDs around the introduction of the AoV regime and what it will mean for them. For Peter Christmas, director of client management at NatWest Trustee and Depositary Services (TDS), it’s a simple case of educating iNEDs about the role depositaries play in the funds ecosystem going forward: “While there’s an awareness of what the depository does, there is a lack of understanding of the limits and what they do and don’t do,” he told Taneja, lamenting the low levels of representation of former depositaries on fund boards.
“So in short, the depositary now has an evolving role and is increasingly focused on how to protect investors. We want to promote that and to improve understanding”
Mark Crathern, head of NatWest TDS at RBS International
“Very few end investors even know we exist, so we could publicise our role more to reassure and inform the investors that there is somebody there who oversees the asset manager and how important that role is, despite it being hidden slightly,” he said. Taneja suggested that a growing focus on the role of fund boards would be reflected in future sessions, and Mark Crathern, head of NatWest TDS at RBS International, agreed.
Speaking as a panellist on a session looking at governance, oversight, the role of iNEDs and the role of the depositary, Crathern explained: “Our role from an oversight perspective – and how we work with fund boards – is to make sure that people do what they’re supposed to do, and that the NAV is calculated correctly and the cash is handled in the right way. We also look at fund liquidity, and – increasingly – we take into account the ESG [environmental, social and governance] aspects.”
And while depositaries have access to copious data around fund management, Crathern explained that the opportunity is emerging for them to deliver close to real-time insight on fund performance. “Whether that’s around potential breach in reporting; or around thematic investor behaviour; or some of the challenges facing third parties as they transition from legacy to more digital technology, we do have data that can aid understanding.”
“So in short, the depositary now has an evolving role and is increasingly focused on how to protect investors. We want to promote that and to improve understanding,” Crathern said.
Getting the word out
That means educating end investors in particular of the depositary’s vital role in the value chain and ensuring that funds and investors all understand the various risks, drivers and trends affecting fund management. “We really hope the industry can embrace that too,” he said. “Because we need to create that connectivity between each player. Depositaries need to be more proactive, and it would be remiss of us not to use our position and data to help boards.”
Fellow panellist Kirstene Baillie pointed out that while the depositary’s role has always been fundamental to good fund governance, the fact that the recent survey showed that three quarters of respondents didn’t really appreciate the role was a concern. And, as an iNED and partner at Fieldfisher, she agreed with Crathern that depositaries can bring much to the table through independent analysis.
“I do believe that the data point is critical,” she said. “The depositaries have the strength to bring that analysis to the table, which iNEDs don’t, since we’re individuals. Whereas if you can bring a banking framework into it then you’ve got much greater capacity to use powerful tools like data analytics.”
And she argued that allowing depositaries and iNEDs to use different data sets to that deployed by the fund managers may in fact end up strengthening fund governance. “That’s because you’re likely to get a broader view. Those data sets from the depositary could provide a really useful independent resource.”
Diversity is strength
Ultimately, Baillie agreed with her fellow participants that strengthening and improving board performance is in everyone’s interests. But what does the fund board of the future look like?
A panel looking at the future of fund governance brought together a number of industry players to look at board composition and outlook. And two key words – independence and diversity – cropped up again and again.
According to Honor Solomon, head of retail, Europe, Middle East and Africa, at Legal & General Investment Management: “In 2018 only 17% of directors were women, but we’re seeing the discussion broadening out from gender and ethnicity to socio-economic backgrounds and neurodiversity.”
And she added that while the Financial Conduct Authority’s call for 25% of the board to be independent had underpinned a greater drive towards independent representation on boards, diversity still required more of a push. Peter Christmas agreed, and suggested that change will only come when diversity of thought is the driving force. “As depositaries we sit on a lot of boards where directors come from similar backgrounds,” he told the session, explaining that many of those around the table bore a striking resemblance to each other in terms of outlook and skillset.
Part of the reason for that, he argued, was the complexity of regulation that led to the prioritisation of a certain set of technical expertise from similar places. So where to ‘source’ that independence? James Rainbow, head of UK distribution and Latin America at Schroders, said the question is a tricky one. “Can you really – truly – represent the interests of investors if you come from an entirely alien industry; or do you have to have some form of industry knowledge, even from adjacent sectors? I think that’s where debate will rage in the future.”
Ultimately, whatever skillset and background is represented, boards have to keep one key issue in mind: “Good governance is really important,” Christmas concluded. “And having independent boards and regulations like AoV are all good examples of that. Having the highest standards of fund governance makes the UK funds industry tremendously competitive and we should be proud of that and promote it.”