In this article a fund administration veteran who also used to audit insurance funds looks at the consequences of financial regulators’ increasing insistence on good corporate governance at fund management firms.

Minute-taking ought also to be comprehensive in terms of discussion and deliberation. There are two schools of thought here, however, as the minutes of meetings are traditionally restricted to the actual decisions that the board takes. Financial regulators, however, favour (but do not yet insist on) the former approach. The board should not approach this exercise by replicating large tracts of text that already exists in other board papers.

Evaluations

The third area that boards should consider is their 'evaluation process.' The FRC code for listed companies dictates that each company should have an external evaluation every three years. In between years, internal evaluations are fine.

Many boards may be operating effectively, but all can improve their performance and ought to consider some form of internal or external evaluation. There are considerable advantages in doing so, particularly when an independent external firm carries out an evaluation. Such an assessment certainly has its benefits.

Firstly, it assesses the skills that members of the board have. This assessment extends to any committees of that board and ultimately is a gauge of how effective they are. Fund firms may change their strategies and their performance can fluctuate, so any assessment of the skills that board members have may be needed now. An evaluation often calls for a regular audit of skills.

Second, an evaluation can concentrate on ‘diversity,’ in the widest sense of the word, encompassing gender, ethnicity and background as well as skills. ‘Diverse’ boards are often thought to make more effective decisions but, whatever the situation, regulators and others are concentrating upon this area and firms ought therefore to keep it under review.

Third, an assessment provides the regulators with the opportunity to look at the dynamics around the boardroom table. Skills are important but dynamics are more so – if a bank has all the right skills in the boardroom but five people do not work well together, it is likely to have a dysfunctional board. An evaluation might reveal this and answer other questions into the bargain. Is the chairman a good facilitator who provokes discussion, or does he dominate every meeting? What contributions do other people on the board make? Do people listen to each other? It is fair to say that interviews organised by an external third party – along with its eventual appraisal – are often the most important components of any evaluation.

Fourth, the evaluation should consider the matters being discussed. 'Agenda management' may sound dull but it is vitally important to the effectiveness of a fund firm. Is the board discussing the right things, and is it setting the right priorities?

Finally, an evaluation is bound to look at the quality of the management information (defined as information that a firm collects during a period of business activity that it can use it to measure performance and spot risks) that comes before the board. Independent directors, in particular, depend heavily upon 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 concentrate, or do they just swamp the board with information?

Spotlight on effectiveness

The workloads of directors and the many groups that support them have increased considerably over the years. Regulatory scrutiny – but also scrutiny from investors and others – has also increased. It is therefore more important than ever for fund firms to ensure that their boards work effectively. Boards also need to think about how they monitor their effectiveness, through the use of self-assessment processes and through external assessments. Regulators are concentrating more and more on effectiveness, going beyond a mere look at whether this-or-that fund firm has the right procedures of governance. This trend is going to continue.

* Hubert Nicolle can be reached on +44 (0) 1481 747814