Global Fund Sector Increasingly Aware Of Governance, Conflict Of Interest Issues

Tom Burroughes

30 October 2013

A survey of global investment groups together overseeing over $9.5 trillion in assets under advice shows that almost three-quarters of them believe that fund governance has become a more prominent issue in the past four years, and 90 per cent want fund boards to address conflicts of interest as a matter of routine.

The survey was carried out by Carne Group, the provider of independent governance and oversight solutions for the fund management sector.

The findings come at a time when oversight of how funds operate has been tightened in various jurisdictions such as the European Union and US in response to concerns about lack of control and clear information in the past. In the EU, for example, the bloc has recently enacted sweeping regulations on the alternative investment fund management sector.

A lack of independent fund directors on fund boards and a lack of experienced fund directors are seen as the two primary failings in fund governance arrangements, the survey found. It also showed that investors rate governance in the broader funds industry at 5’s and 6’s out of 10 rather than a desired 8 or 9 out of 10.

Most independent fund boards and fully independent service providers are regarded as the best means of managing conflicts of interest at the fund level.

Among other findings was that 83 per cent of investors would like fund boards to have a majority of independent directors and 62 per cent to have an independent chairman; some 95 per cent of investors would like to see a fund industry global code of governance in place. Most investors want the industry to provide the solution and do not want more regulation.

“A risk management background is now considered the most sought after professional skill for independent fund directors, according to investors. This is in contrast to two years ago when a premium was placed on directors with a legal background,” the survey authors said.

Participants in the survey included wealth managers, pension fund consultants, large pension schemes, insurance companies and sovereign wealth funds. The paper also includes guidance on mitigating possible conflicts for fund managers and boards.

“Investors felt there have been enhancements to fund governance in the last two years, however they also voiced a variety of concerns about conflicts of interest when we consulted them for this research and wanted more focus on conflict identification, mitigation and management by both onshore and offshore funds. They also felt a lot could be addressed by fund boards with competent independent directors,” John Donohoe, chief executive of Carne Group, said.

“There has been considerable improvement in board level governance in some quarters of the industry since our last survey, and that has to be recognised,” Donohoe added.

The survey was conducted by Carne in the first half of 2013.