Investor expectations are increasingly out of sync with board composition in the ESG era, according to a report done for Jersey Finance, which represents Jersey Island-domiciled entities.
The report entitled Funds Governance in 2021: What it Means to Investors concluded that, ultimately, the answer is not much. A survey by IFI Global of 26 investors and their advisers found that 84 percent of respondents said that they thought governance is helpful but not that important. Only 8 percent of investors viewed governance as important. Respondents were based in North America, Europe, Asia Pacific and the Middle East.
“Perhaps the most interesting takeaway from this research is the challenge governance presents to fund boards and to asset managers: what can they do to make fund governance more relevant to more investors?” the report asked. “There is a danger, at least outside a crisis occurring at a fund, that what the board does on a routine basis passes many, if not most, investors by.”
It is the first such investor survey on fund governance done in five years, and, while there was a large amount of agreement between the limited partners and advisers surveyed, there was some differences from the previous survey. For example, back in 2016 most investors said they would decline to invest in a fund with weak governance. The latest survey shows that only 31 percent would decline to invest in companies that had a weak board – though those who wouldn’t often noted that they hadn’t come across a board so poor it affected their investment decision. One respondent said they had agitated for change on a fund’s board. And whereas most investors (more than 90 percent) wanted more direct communication with directors in 2016’s survey, only a minority felt that way this time around.
That is likely because LPs have gotten what they want in terms of direct communication in the last five years. “Most large investors have their managers exactly where they want them these days,” the report concluded. “They do not believe that they need to worry about fund boards.”
Other findings include respondents most value directors’ experience and independence. Gender diversity ranked lower than those two qualities in the most recent survey. Respondents (85 percent) also uniformly favored term limits for directors. They also wanted more transparency in the election and selection of directors and fund board compensation (also 85 percent).
“In a period where we have seen unprecedented change, fund governance continues to evolve at a relatively slow pace,” said Elliot Refson, head of funds at Jersey Finance, which commissioned the survey. “The findings of this new study provide valuable insight into the thinking of investors, who we know, based on this and previous research, are driving change in the alternative space.”
Surprisingly, only a slim majority (54 percent) of respondents said that they believe ESG considerations will have an impact on fund governance.
When it came to experience, respondents said that they wanted directors to have management experience in specific industries. What they say they see too much of on boards are accountants, lawyers and service providers, according to the report.
But even though respondents value fund board experience and independence as important, such qualities were of little or no importance to making investment decisions for 54 percent of respondents.