Around the country, there persists a view that the City of London is a network based on old school ties that extract high fees at the expense of the pensions and savings of the majority. 
A feature of recent years has been the relative popularity of investment trusts with private investors, rather than open-ended mutual funds, whereas intermediaries tend to support open-ended funds rather than investment trusts.
This speaks to the image problem of open-ended funds among the private investor.
However, a recent innovation could change all of that, with the requirement under the FCA’s Asset Management Market Study for UK-based open-ended funds to have boards with at least 25 per cent of its members being independent non-executive directors.
The role of a non-executive director is to act in the interests of all stakeholders, including investors in the fund. This has the capacity to improve the image of open-ended funds among investors, and drive future flows into the asset class.
However, there could be some headwinds. The capacity for independent non-executive directors to improve both the image and actual governance of open-ended funds will be limited if fund houses simply pay “lip service” to the regulations, and the innovation of independent non-executive directors shrivels into another strand of the traditional City network. Under this scenario, the roles of independent non-executive directors would be limited to a simple box-ticking exercise. But this approach would simply reinforce the public’s perception that fund management is a closed shop, set on preserving its own interests and offering nothing for the saver in the street.
The best way to ensure that independent non-executive directors serve the purpose for which their creation was intended is to ensure that a diverse range of individuals are recruited for these roles, from a wide range of backgrounds, and with a wide range of experience. Diversity means skillsets ranging from experience in distribution and governance, to compliance and operations, as well as a balance of gender, ethnicity and life experience.
So why does diversity matter?
A 2015 McKinsey report on 366 public companies found that those in the top quartile for ethnic and racial diversity in management were 35 per cent more likely to have financial returns above their industry mean, and those in the top quartile for gender diversity were 15 per cent more likely to have returns above the industry mean. Furthermore, in a global analysis of 2,400 companies conducted by Credit Suisse in 2012, organisations with at least one female board member yielded higher return on equity and higher net income growth than those that did not have any women on the board.
Most recently, Harvard Business Review published a study earlier this year that found that while diversity was important, the culture of US boards was equally, if not more, important. It was also found that a more open environment encouraged quieter board members to speak up at meetings and, more generally, helped to foster ‘diversity of thought’.
But the importance of diversity is not just about the independent non-executive directors working well with fund boards. It’s about the end investor knowing that the directors have their interests at heart. With a diversity of backgrounds and the right knowledge represented among the directors, I believe a more robust focus on ‘value’, as outlined by the Financial Conduct Authority (FCA), will be easier to achieve. Indeed, the FCA is now looking at a raft of elements including quality of service, performance and fund management costs.
In fact, a focus on value is not a new concept in financial services. In the institutional world, the Chair Statement of DC schemes must now include a value for money assessment. Alongside this, a new industry standard for institutional investment cost data was announced recently through the Cost Transparency Initiative – a collaboration between the Pension and Lifetime Savings Association, The Investment Association and the LGPS Advisory Board. This initiative has led to a set of templates and tools which together form a framework that pension schemes can use to receive standardised cost and charges information from asset managers.
However, the focus on value is unchartered waters for the asset management industry outside of the institutional channel and this is why its correct implementation is so critical in helping build investor trust in the industry. We believe that independent non-executive directors can be a good sounding board in helping fund boards work through their value for money assessments.
The innovation of independent non-executive directors on fund boards has the capacity to help clients achieve ‘value’, but only if the recruitment, training and retention of those directors is based on merit, and not old colleagues doing each other a favour.
Paul Boughton is chief executive and founding partner of MosaicNED, which sources, trains and places independent non-executive directors on UK fund boards. The views expressed above are his own and should not be taken as investment advice.