(October 25, 2013) — Institutional investors must challenge board directors of unlisted funds if they are to see an improvement in transparency and governance, a campaigner has said.
Charlotte Valeur, director of the Global Governance Group, told aiCIO that while campaigners were working to encourage improved governance on unlisted funds’ boards, the truth was that money talked and they would be far more likely to listen to investors.
These funds could include smaller, segregated, specialist funds, rather than those pooled funds run by larger, more well-known fund managers.
“We are pushing for the unlisted fund space to give some level of transparency—even just one page detailing the board members, where meetings are held, and what was discussed—that would be start,” she said.
The drive for these basic pieces of information has come from Valeur’s conversations with large institutional investors, including Railpen and USS in the UK.
“Unlisted funds need to be aware that if they want institutional capital, they’ll need to offer good governance from the start,” she continued.
Examples of poor fund governance were plentiful in the industry, Valeur revealed. Boards with temporary chairmen, boards filled entirely with family members and friends, and directors with more than 200 directorships to their name were all pointed to as examples of bad practice she had come across.
To help in her mission to bring unlisted funds into line, Valeur has appealed to institutional investors to ask five hard-hitting questions of their unlisted funds’ boards.
These are:
1) Ask about the composition of the board. Fund boards should have more than one independent sat on them, be experienced in the industry, and have regular board meetings. Investors should quiz the fund about what is discussed in the meetings, whether summaries are distributed to investors, and whether they meet their auditors separately from their investment managers.
2) Ask what the board processes are—if they meet less than once a year, as if there are little or no formal processes in place that is a good indicator of how seriously they are taking their role. An annual letter describing the board’s practices should be a bare minimum.
3) Ask how many directorships each board member already holds. “If something goes wrong, you need to make sure they have enough time,” Valeur advised. Ask them to disclose any remuneration for the role—if they’re not being paid at all, that could be a warning sign.
4) Determine who has voting rights to keep members on the board. In many cases it’s only the investment manager with the rights, leaving investors powerless to remove poorly performing directors.
5) Ask to speak to them directly. “If they won’t speak to you, you’ve got to question why,” said Valeur.
Related Content: Investors Demand Better Governance from Hedge Funds and Alternatives and UK Pension Funds Launch Governance Index