2020 Vision: Are Fund Boards Short-sighted on Remuneration?’
One of the more challenging questions ahead for iNEDs will be confronting executive remuneration. Pay has again come into focus following more negative news from ‘that fund’. What should iNEDs consider what is reasonable versus what constitutes a conflict of interest or of detriment to fundholders? Does it have a bearing on value? As we step boldly into 2020 how good is our foresight when it comes to what and how much fund managers and owners are paid?
2020 is set to be a year of near and far sighted revelations and a plethora of ophthalmic references at every turn, event, conference and blog. We make no apologies. Personally, I am very short sighted and for years a good day was when I could see the sign let alone the actual letters. So eyes wide open for my New Year diary entry. Delivery of the Assessment of Value (AoV) is not far away and I’ll return to it next month. For this blog it seemed timely to consider remuneration and the implications for fund boards and iNEDs.
Not all fund groups have dedicated independent remuneration committees but many do and, if publicly listed, then they must. Whichever, remuneration may be covered away from the fund board and that makes matters of owner dividends, fund manager pay and investment fees all the more challenging. For smaller boutiques there is often only one Board and it has to sign-off on remuneration and dividend payments to owners and executives. This may present a tricky situation for iNEDs. Remuneration in turn becomes an input to AoV consideration #2 “Costs” meaning that whether dealt with by the fund board or not; it will have bearing on your value assessment. However challenging pay and payments may quickly trigger push back from executives whom see remuneration as off-limits for iNEDs and the AoV. For within the detail of a firm’s remuneration the cultural DNA of a firm can be discovered.
Yet the question refuses to go away. Like that funny puff-of-air test they do at the opticians, you know it needs to happen but the process feels just a little uncomfortable. Remuneration too for fund managers has been a difficult area. The Woodford fall-out means that fund boards should be discussing pay, bonuses, capital payments and dividends, but are they? A typical recent headline;
“Investors trapped in Neil Woodford’s main fund, which collapsed last year, have expressed their dismay that the former star stock-picker and his business partner, Craig Newman, took home £13.8m in dividends from their investment management company last year.”
The problem with the latest Woodford revelations was that the purported payment of dividends was paid from the company account, the operating capital, not the fund. The payments may not even be related to profits from fund fees. A firm can be in operating loss and still pay owners a dividend through the alchemy of accounting. Meanwhile in accounting terms they have no direct bearing on fund costs or the reported NAV performance; yet indirectly investors may question the motives of executives paying themselves dividends during periods of fund underperformance, suspension, redemption or operating loss. Woodford earnings during the suspension of Woodford Equity Income Fund was well reported. Extracting capital can look a lot like rats escaping a sinking ship, repatriating capital before insolvency. The optics looked poor. The optics for fund boards and serving iNEDs even poorer. Where was the challenge? It’s a question of fortitude and long-term sustainability. It’s a bitter lesson that fund boards need to learn from.
The issue is triply important because fund managers are expected to be stewards over wider executive remuneration, in the companies they invest in. There is also increasing importance placed on Environmental Social Governance (ESG) and within that delivering the Corporate Governance (‘Stewardship’) Code. Collectively fund managers appear to have failed to control executive remuneration with ballooning CEO salaries; simultaneously dogged by poor stories around their own fund fees and remuneration.
Exhibit A. UK company executives will likely have collected more in remuneration over the first three working days of 2020 than the amount to be received by their average employee for the whole year. In 2018, the average FTSE CEO collected £3.46m, £901.30 an hour. The average annual pay for a full-time worker was £29,559, or £14.37 an hour.
Stewardship relies on more effective remuneration. Moreover, we should seek owners and fund managers to be paid for good customer outcomes; not for the size of assets accumulated or by virtue of status or founding hierarchy. To deliver value. Oversight as a fund manager grows, or in the case of Woodford, decline is essential. Escalating challenge in principal might sound easy; in practice less. If that still isn’t clear then perhaps go to Specsavers, or other good opticians!
Now if you can just read from the bottom line for me. R.. E.. M.. U..
JB Beckett, FBC iNED Member
iNED, Author ‘New Fund Order’
For more information, members of regulation may find the below of interest and additional reference in:
- IA 2016 Remuneration Code
- UCITS Remuneration Code (“UCITS Code”) came into force on 1 January 2017.
- FCA’s prudential sourcebook for Investment Firms (“IFPRU”).
In his monthly column, Diary of an iNED, JB will record his experiences on the boards of two very different organisations as he navigates the highs and lows of a plural career at a time when the fund industry is beset with challenges and opportunities in equal measure.
JB can be contacted at email@example.com.