As William explains to the FT’s Ignites Europe (requires subscription), many asset management companies already have ‘Independent Directors’ but the word independent in this context means something different. They are independent of the company’s management team, but not of the company’s shareholders as a whole, because it’s an important part of their role to act in the best interests of these shareholders.
The FCA report demands that a new type of Independent Director be appointed who will be independent not only of the asset manager’s management team but also its shareholders and their interests, and will instead act in the best interest of another set of investors – the investors in the funds managed by the company. This makes their role much closer to Independent Non-Executive Directors of Investment Trusts, who must be independent of the asset management company that manages the investment trust, and act in the best interests of the investment trust’s shareholders, not the asset manager’s shareholders.
The roles will not be completely identical – investment trusts are usually quoted on the London Stock Exchange so their directors also take on the duties of quoted company directors. Investment trust directors also have to take responsibility for discount-control mechanisms and gearing which most of these new kinds of independent directors envisaged in the FCA report won’t have to deal with. And all investment trusts boards are either solely or mostly composed of independent directors, whilst the FCA demands only that asset managers appoint two independent directors, so they will have a more specialist function.
In terms of what sort of people these new independent directors will be, nobody knows for certain yet, but again investment trusts probably provide the best guide. Almost all investment trusts want at least one of their independent directors to have first-hand experience of investment management – successful investment management after all is the sole purpose of the investment trust. But few investment trusts want boards composed entirely of former investment managers, so search firms that work for investment trusts like First Flight are often asked to find people with other types of ‘financial expertise’ and ‘financial sector knowledge’ such as former successful accountants, bankers, brokers, analysts, City lawyers, wealth managers, venture capitalists, financial marketers or company CFOs. Some investment trusts also have a very specific investment focus, and they will typically want at least one independent director on their board who has had a successful career in the kind of company they are investing in, so a trust investing in technology companies will typically want a successful former tech company CEO, whilst a trust specialising in US companies will often want a successful American business executive with a Fortune 500 background.
There are however, literally hundreds of investment trusts with thousands of independent directors, and not all of them neatly fit into the above boxes. Look hard enough and you will find a few former diplomats, civil servants, scientists, engineers, admen, spies, academics and journalists, but these are the exceptions not the rule, and they tend to sit on boards with more than four independent directors. Given that the Authorised Fund Managers covered by the new FCA regulations will only be required to appoint two independent directors, we suspect most will ask search firms like First Flight to stick to former investment management professionals, plus a smattering of lawyers and accountants. But only time will tell.
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