Comment: Self-evaluation increasingly critical for CI fund boards

Posted: 02/12/2019

Comment_Altair_AndreasTautscherComment_Altair_IanWhiteIn the wake of new substance rules, it’s time for non-listed Channel Islands funds to take their corporate governance to a different level and consider the use of external assessment and advice. By Andreas Tautscher, CEO, and Ian White, Consultant, at Altair

For many companies, evaluation of the board has been required for some time. Many UK-listed companies – both trading companies and funds – have to comply (or explain the extent to which they do not) with the requirements of the UK Corporate Governance Code, which highlights that there should be ‘a formal and rigorous annual evaluation of the performance of the board’.

For non-listed Channel Islands funds, there is an ongoing requirement under codes of corporate governance. However, a number of factors indicate that the time has come for boards to take this to a different level and consider the use of external assessment and advice.

Substance has become the topic of the moment. At its core, it asks that the board shows it is effective in overseeing the business of that entity in the jurisdiction where it is registered. 

At the same time, we are seeing more examples of investor or other groups making judgements on the decisions of fund boards and the level of perceived governance standards. Indeed, recent examples in the media indicate that perhaps there is some room for improvement. 

Regulators are also taking more interest in who is on boards, and how they handle the decision-making and recording process. 

Benefits of evaluation

So, is it time for fund boards to consider an evaluation process? While many boards of funds may be operating effectively, all can improve their performance. There are considerable advantages in doing so, particularly if the evaluation is carried out by an independent third party. 

We see five key benefits from these assessments:
•  It allows an assessment of the skills needed around the board. Funds may change their strategic direction and performance can fluctuate, so assessing what skills may be needed now and in the future is a worthwhile exercise. A regular skills audit may often be a recommendation that comes out of an evaluation.
•  There can be a focus on diversity, in the widest sense of the word, encompassing gender, ethnicity and background as well as skills. Diverse boards are often considered to make more effective decisions but, whatever the position, regulators and others are very focused on this area, so it is an issue to address and keep under review.
•  It provides the opportunity to look at the dynamics around the boardroom table. If you have all the right skills in the room but five people who don’t work well together, then you are likely to have a dysfunctional board. An evaluation enables the dynamics to be assessed. Is the chair a good facilitator in driving discussion or do they dominate? What is the contribution like from members? Do people listen to each other? It is fair to say that the interviews and observations of an external third party are often the most important components of any evaluation.
•  The evaluation should consider the matters being discussed. Agenda management may sound dull but it is vitally important to effectiveness – is the board discussing the right things, and is it prioritising?
•  Finally, an evaluation will look at the quality of the management information coming to the board. Non-executive directors in particular depend on the quality of this, and too many boards receive heaps of data and not enough meaningful information. Do the papers highlight the matters on which directors should focus or do they just swamp the board with information? 

Like all high-performing organisations, fund boards should be actively considering their performance, and the impact this has on the quality of their decisions and ultimately the performance of their fund. From a Channel Islands perspective, this is particularly important given the demands of the new substance rules and the ever greater oversight and scrutiny of regulators. 

While a high-performing fund board does not necessarily lead to a high-performing net asset value, we assume most boards and investors would not like to take a bet on the reverse also being true.

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