Concerns over Financial Conduct Authority's new iNED rules
Companies may overlook external candidates, argue commentators
With new Financial Conduct Authority (FCA) rules requiring fund management firms to have appointed a minimum of two independent non-executive directors (iNEDs) to their boards kicking in today (30 September), industry commentators have raised concerns fund managers may be relying too heavily on those within the industry to fill the two roles, rather than looking externally.
The regulator introduced the rule on iNEDs following its Asset Management Market Study, which found balancing the interests of investors and shareholders was not always being struck appropriately by boards.
However, Paul Boughton, founding partner of MosaicNED, which sources and trains iNEDs, warned many fund boards "will take the least line of resistance" when hiring iNEDs.
Boughton said: "The introduction of iNEDs will be key to changing the way fund boards are constructed and hopefully to the way fund boards operate on behalf of asset managers and investors."
"[But] there are a lot of people who believe they will make good iNEDs on fund boards and there are a lot of fund boards who will take the line of least resistance and hire through the easiest route, ie, someone they know (not really independent), or someone associated with another part of the firm.
"Is this necessarily in the spirit of the Asset Management Market Study? I would say clearly it is not."
The FCA has stated independent directors can serve for no more than ten years at once, and that directors may not be eligible for reappointment to the same AFM until five years from the end of their last term.
Boughton said for this FCA initiative to work, the asset management industry needed to "embrace the change" and look for a diverse range of truly independent professionals who will add some real value to the board.
Graham Bentley, managing director of investment marketing consultancy gbi2, said the rules raised an interesting question, "as to whether you would have independent directors who were expert, or people who were from within the industry, or whether you would have truly independent people, who would perhaps be far more likely to behave like a customer".
"That would be the first question that I would ask of those boards. Otherwise, if you are not careful, you get group think," he added.
Bentley noted: "Most of the independent non-executives I have seen selected or being considered for selection are people from within the industry."
On whether fund managers are finding enough of a talent pool, Martyn Gilbey, UK country head at Franklin Templeton Investments, said there is significant interest from both within the sector and from broader or connected sectors within financial services.
"We have also seen interest from professional iNEDs from other sectors," he added.
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