For his autumnal double diary entry, ahead of this week’s FBC panel on ‘Measuring Value in Pensions & Mutual Funds’, JB reflects on whether corporate structures support good governance or create impediments overriding the aims of the iNED. In the first of two parts JB asks if individuals matter more than structures or are they both essential?
I must make amends for my hiatus last month. To make reparation I offer a two for one deal. Like a bumper pack of pandemic friendly toilet roll. Just in time.
As my year at the helm of the FBC Diary draws to its inevitable (some might say overdue) conclusion in December, I have a couple of months left to wipe away those niggling loose ends thus far not disposed. Helpfully I was recently prompted for comment, by a well-respected journalist, on the effect of different ‘corporate structures’ in investment management and whether these could give rise to conflicts of interest.
The immediacy of Woodford remains in the shadows of such journalistic enquiry but the questions are far more reaching in my mind. I have touched on conflicts of interest before but wanted to consider more form a concept of structural fragility. All very timely too ahead of the FBC panel on the governance and value across the mutual fund and pension landscape, chaired by the venerable David Butcher and joined by seasoned IGC member Ian Costain.
Unashamedly, to date, I have focused heavily on the individuals and behaviours of boards and committees, the merits of fully independent boards, the differences between committee structures in the fund world and beyond. It is right as independent non-executive directors (iNEDs) that we first recognise our responsibilities, challenges and liabilities. iNEDs rarely can influence corporate structures except when on the company (‘Big’) Board.
The journo question followed FCA’s Marc Teasdale’s concerns about directors sitting on both an authorised fund manager board and the board of the investment manager, particularly in light of the assessment of value process. He was speaking at the Investment Association’s recent ‘Culture in Investment Management’ Forum. Teasdale said; “We often see insufficient consideration being given to the conflicts being further embedded within the typical group structure by heavily overlapping AFM and investment manager boards.”
The response at the time was admittedly gut feel and a bit pithy. I have pondered further, both generally in respect to iNEDs and specifically for my own roles at SVM and Royal London, and in doing so have contemplated the shape of governance structures and the effect of multiple boards and committees and overlapping roles or individual directors. Do more committees improve governance overall? Not necessarily. My view of ‘governance’ over the years is that is observed de facto based on documented functions performed, rather than the outcomes of actions taken. Governance becomes short-hand for a paper being written, a committee giving approval, box ticked and not the demonstrable effect to customers. If there was pure information between frontline and committee that would perhaps bother me less (albeit still wasteful). However, there is an impurity that we have to also contend with.
My worry in all of this is that we see incremental dilution of the ‘why’ in favour of a systematic focus on the ‘what’. Dashboards and narratives become diluted and dumbed down. The link between technical and governance experts and the governance committees, they supposedly serve, becomes distended at the frontline but disjointed at the Board level. In truth, the experts work for the Executive not the iNEDs, the customers or the governance committees (a point universally known but often not mentioned). Middle management (just below the Board) have some responsibility here but we should not let iNEDs off the hook either.
It is for us iNEDs to refuse to be overly curated to, to request access to the experts when we feel we need more insight. To ask ‘why’? This applies to all forms of investment and governance committees and boards. The Executive may not be easily persuaded by the notion of intrusive NEDs but that forms a natural (and healthy) friction. Indeed, I have written about “open dissent”, group think and also about Parkinson’s Law (1958) and how adding more people do not necessarily improve decisions. It is sometimes referred to as ‘The Rising Pyramid’ and founded the concept of coefficients of inefficiency. The old adage of ‘decision by committee’ holds just as much as we cannot allow autocracy as Woodford has shown us. Yet complexity in our governance processes is more likely to obfuscate accountability through a business.
Firms have thrown armies of iNEDs and Execs to form legions of governance committees. Periodically these are purged, merged; only to sprout up again. I’d say the structural lifecycle is about 10 years in pension land. What we end up with are multiple committees, sometimes isolated from each other, at all but the highest level. Isolation can be too easily confused with independence. It leads to a series of referrals and escalations up to a suitably high echelon where someone of sufficient importance approves something, they have limited grasp of. A rising pyramidal dichotomy where the level of decision sought rises but the decision maker becomes less informed. The company secretariat will issue dictums about the length and format of a paper in a bid to try and cap the maximum size of Board papers. In context to the effectiveness of the Board this makes a lot of sense (how many of us enjoy reading those 300-page Board packs?) but in context to each individual governance ask, and the aggregation of those decisions, it is sub-optimal.
Having discussed offline with members of IGCs I can see that Parkinson’s Law will be particularly challenging for Investment Governance Committees (IGC) just when they face into a new FCA review. Often made up of senior industry types and consumer champions (but not typically investment experts) they are being increasingly charged, by the regulator, to assume responsibility for technical investment matters beyond the original bounds of Value for Money (VFM) test for workplace pensions. Their accountability and liability have also increased incrementally since IGCs were introduced. The addition of ESG a good case in point.
At Royal London I feel we have a good solution to this. As a member of its Investment Advisory Committee (IAC), we already have an independently chaired Committee of investment and risk experts upon which the business, our IGC (and Executive Committee) can lean and refer matters. As a transparent committee it is publicly minuted, predates the IGC regime, has much closer dialogue on investment matters and by being advisory only has less propensity for conflicts of interest. It is made up of two independents (one being Chair) the Chief Risk Officer, Senior Director, Investment Office, and CIO. As a side note no independent members of the IAC can sit simultaneously on the IGC but the Chairs of the committees can guest and there is a healthy ongoing dialogue.
I have to conclude that good governance remains reliant on the actions of the individual but is fragile to complex non-transparent committee structures. I look forward to our FBC panel on the 15 October to discuss further.
Caveat Non Exsecutivam.
In his monthly column, Diary of an iNED, JB records 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.
FBC will bring together an expert panel to discuss some of the challenges and opportunities in enhancing overall investment governance and in particular look at each group’s experience of measuring and articulating the value they bring to their customers. We’ll delve into the role of the board, their independent members and related committees. We’ll examine the resourcing and competencies required and specifically, what lessons we can take from the pensions’ industry’s Value for Money initiative and its mutual fund counterpart, Assessment of Value. Find out more here