16 August 2024
The Importance of Strong Corporate Governance for all Asset Managers
Your firm isn’t on the Investment Association’s list of largest UK-domiciled asset managers. The marketing budget wouldn’t cover a premier league sponsorship. Pictures of your senior management and investment teams fit on a single web page.
Strong corporate governance is a sign of a well-run enterprise regardless of ownership status, employee headcount or industry. Yet many boutique asset management firms think their size and status exempt them from this responsibility.
“The reality is if a client sues your firm, say for breach of mandate, or the Financial Conduct Authority (FCA) initiates a Section 166 investigation, your firm’s lack of sound corporate governance gives them ammunition. Being able to demonstrate that your firm has strong corporate governance is your best defence” says Alex Burton Brown, an Executive Director at Gallagher Specialty.
The classic definition of corporate governance is that it “…refers to the system of rules, practices, and processes by which a company is directed and controlled.” It guides the direction of the company as well as the conduct of its employees.
A company’s board of directors, rather than its management team, holds the responsibility for developing and upholding the organisation’s corporate governance standards. How boards are typically structured varies from one jurisdiction to another. Specifically, corporate governance:
· Provides a framework for effective decision-making and strategic planning.
· Establishes accountability and transparency.
· Fosters trust among employees and stakeholders.
· Enhances a company’s reputation.
· Mitigates financial and reputational risk.
· Promotes ethical behaviour to ensure compliance with laws and regulations.
Strong corporate governance is a sign of a well-run enterprise, regardless of ownership status, employee headcount or industry. It’s one of the best ways to protect your firm’s reputation.
The 'G' in ESG
Even if your firm doesn’t manage an environmental, social and governance (ESG) fund or portfolio, you’re likely aware that many managers particularly focus on the ‘G’.
The 2007-2009 financial crisis caused many investment managers and institutional investors to rethink conventional risk analysis and to give greater weight to corporate governance issues, such as board independence, which could have an impact on stock performance. They began to look for companies that demonstrated good corporate governance as a way of reducing volatility and risk in their portfolio.
A focus on the governance component of ESG is also seen as a way of reducing downside tail risk, the impact that a low-probability, high-impact event could have on a company’s stock price.
Good corporate governance will reduce your firm’s tail risk as well.
Compliance is about the letter of the law, governance is about the spirit of the law.
It's not compliance
With so much focus in the asset management industry on regulatory compliance, it’s easy to think that corporate governance and compliance are one and the same. They’re not.
Compliance is the process of following the relevant laws, regulations, contracts, strategies and policies that are in force for your industry in the jurisdictions in which you operate. For asset management firms, that means adhering to the regulations set out by the Financial Conduct Authority (FCA). Firms that manage assets for investors outside the UK are subject to the financial regulators in that country or region as well.
As a governance consultancy put it, compliance is about the letter of the law, governance is about the spirit of the law.
Of course, there are areas of overlap between corporate governance and compliance. For example, how a firm defines and manages conflicts of interest is often addressed in a corporate governance framework. At the same time, the FCA Principle 8 states that firms cannot let conflicts of interest interfere with their obligations to their clients.
A second opinion
At a boutique firm, it’s not uncommon for the founder to be CEO and Chief Investment Officer and even manage a fund or portfolio. Key executives may be related by either blood or marriage; Legal counsel may have compliance responsibilities and head the human resources team. So, the idea that your firm needs a board of directors with independent members might feel like a stretch. However, fewer employees do not always translate into less exposure.
Many boutique firms simply lack the resources to take on a corporate governance implementation, let alone conduct an internal evaluation. Bringing in a consultancy to review your firm can provide an unbiased view of where you stand from a corporate governance perspective without relying on stretched internal resources.
While this type of audit is more typically done when a company is considering a sale or strategic change in direction, it is a worthwhile exercise if your firm lacks a formal well-resourced corporate governance framework. If your firm has a board of directors, evaluating its composition and effectiveness will be part of the review process.
Policies and practices
For 2024, the Financial Reporting Council has updated the UK Corporate Governance Code with a focus on strengthening transparency and accountability in corporate practices. While this code is designed for UK public companies, it provides the best governance blueprint for UK companies of any size, public or private.
Having written policies codifies your corporate governance framework and makes it clear to employees and other stakeholders that your firm plans to adhere to ethical business standards. Assuming that you already have an investment management and risk management policy in place, policies worth putting in writing for a smaller firm include:
· Code of ethics
· Conflict of interest
· Data practices
· Privacy
· Bullying and harassment
· Whistleblower
· Financial management
· Business continuity
Your corporate governance consultant or your outside counsel can help you identify which documents you need and help you develop them. The Corporate Governance Institute publishes a range of customisable policy templates for its members.
Adopting robust corporate governance practices is crucial not only for regulatory compliance but also for protecting your firm's reputation and mitigating risks. Insurance providers often take strong governance frameworks into account when underwriting policies, therefore the demonstration of good corporate governance as part of an effective disclosure process to insurers can be a helpful differentiator. The Financial Institutions team at Gallagher are best placed to advise how such disclosures can be made effectively in order to enhance your firm’s insurability and thereby achieve better coverage terms and lower premiums.
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