“I always talk about governance as being a journey,” said independent director during a press conference hosted by the Association of the Luxembourg Fund Industry during its Global Asset Management conference on 19 March 2024. Gordon-Hart, who is also a partner in The Directors’ Office in Luxembourg, moderated a panel dedicated to corporate governance trends in the US, Asia-Pacific and Luxembourg during the conference.
As an independent director, Gordon-Hart explained, she partners with fund promoters on a “governance journey” to engage on behalf of investors. “That’s actually what the role of the independent director is. It’s to safeguard the interests of the underlying investors. And it’s really an important role.”
“Reams of regulation” to comply with
But this role is becoming more and more difficult with “the reams of regulation” that “keep landing with a thump on the desk, because all that has to be taken into account,” said Gordon-Hart. The Sustainable Finance Disclosure Regulation (SFDR) is an example of regulation that “has resulted in an enormous amount of paperwork.” It’s a good thing these reports don’t have to be sent via the post, she quipped, as otherwise there would be a lot of medical bills to pay for the mail carriers who’d have to courier these documents back and forth.
“I’m all for transparency, of course,” Gordon-Hart added. “But a lot of the disclosures around SFDR are not going to be understood by investors, and not going to do anything to engage them in what’s going on in the portfolio they’re invested in.”
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“I wish sometimes regulators would be a little more advanced in their thinking,” she said. “Obviously, at the root of everything they’re doing is investor protection. But I’m not sure you achieve that just by throwing paper at people, no matter what’s written on those pieces of paper.”
Making things “simple and straightforward”
“The role of the independent director is to challenge, and to do that in the interest of the underlying investors, which means challenging management, which means challenging service providers. And it’s all done in the interest of building trust.” The , which was put together after the 2008 financial crisis, aimed to lay out a framework for a regulatory agenda, stronger coordinated supervision and effective crisis management procedures to build confidence and trust. Trust, said Gordon-Hart, needed to be restored.
“And to some extent, I think, give or take a few dips in the road, trust is gradually being restored,” she added. “But it’s up to everybody in the industry to work very hard.”
“Whilst I think that I have investors’ interest at heart, I want everybody--all of the service providers--to think in that way, and to make things as simple and straightforward for investors as possible,” said Gordon-Hart. Some , and there are “vast swathes of people who wouldn’t know a capital market instrument if it hit them in the face. We want to get them invested, and the Retail Investment Strategy is a really important part of that, the capital markets union is absolutely vital.”
The answer rests with the fund companies doing a better job of engaging with investors
“But I think just regulating isn’t necessarily always the answer. The answer rests with the fund companies doing a better job of engaging with investors and spreading the word.”
Gordon-Hart offered the example of a client who she said did a “really good job” of engaging. The London-based investment management company Fundsmith, she explained, puts its annual general meetings on Youtube, which fosters discussion and engagement with investors. And given technology today, increased investor engagement should be easier. “I’m not saying this model is applicable to everybody, but take a look. It makes you want to go and invest. It tells a story. And that’s what investment is--it’s about a story.”
Only one-third of largest funds have codes of conduct
Deloitte Luxembourg, noted Gordon-Hart, has of the 2022 annual report disclosures from the 100 largest undertakings for collective investment (UCIs) in Luxembourg, based on assets under management, which aims to provide an overview of corporate governance practices in Luxembourg. Together, the 100 funds represented $3.34trn of assets under management, but only 38% of the UCIs disclosed in their annual report that they have adopted a corporate governance code, found the study.
“I would have expected those top 100 funds to set the bar, to be in the vanguard of engagement and best practice,” said Gordon-Hart. “I’m a bit disappointed, frankly, because they’re not.” When looking by the country of origin of the fund sponsor, only two of the 15 French funds had adopted Alfi’s code of conduct; zero of the eight German funds had done so. The statistics were a bit better when looking at the UK (11 of 14 funds had adopted Alfi’s code of conduct) and the US (15 out of 20 had adopted the code).
“I think that’s a shame,” said Gordon-Hart. Yet “it also speaks to the fact that some boards don’t even seem to want to engage with investors.” So how can they do so? “A big annual opportunity is to pen a directors’ report to go on the annual report,” she explained.
But even then, only 83% of the UCIs covered in Deloitte’s study presented a separate directors’ report. “I find that quite shocking. What are they being paid for, if they can’t even put together a directors’ report to introduce the annual report?”
One of the challenges for a board always is not just to become a box-ticker
“A lot of funds have got some way to go,” she said, and “is a very good place to start.” It provides boards with a framework of principles and best practice recommendations for the governance of Luxembourg investment funds and management companies. For the most part, “most fund boards do do a good job,” but in terms of homework, they haven’t all passed Gordon-Hart’s test.
But, she noted, “one of the challenges for a board always is not just to become a box-ticker. And of course, with the volume of stuff we’ve got now,” that’s a risk. “Our role is oversight--oversight of distribution, which is really key--but oversight of all the other service providers, and, in particular, that all the investment strategies are being adhered to, and that there is proper delivery to the underlying client.”