Mutual Fund Directors Governance Survey

Bernadette Geis is Asset and Wealth Management Trust Solutions Leader at PricewaterhouseCoopers LLP. This post is based on her PwC memorandum. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance by Lucian A. Bebchuk and Roberto Tallarita (discussed on the Forum here); Companies Should Maximize Shareholder Welfare Not Market Value by Oliver Hart and Luigi Zingales (discussed on the Forum here); Reconciling Fiduciary Duty and Social Conscience: The Law and Economics of ESG Investing by a Trustee by Max M. Schanzenbach and Robert H. Sitkoff (discussed on the Forum here); and Exit vs. Voice by Eleonora Broccardo, Oliver Hart and Luigi Zingales (discussed on the Forum here).

About the survey

PwC 2021 Mutual Fund Directors Governance Survey has gauged the views of Mutual Fund Directors (“Directors”) across a diverse range of complexes from large to small as well as geography on a variety of matters. In 2021, nearly 120 independent directors participated in our survey. The respondents represent a cross section of complexes, nearly 40% of which oversee $100 billion or more in assets under management. Seventy percent (70%) of the respondents were men and 27% were women (3% preferred not to say). Board tenure varied, but 62% of respondents have served on their board for more than eight years.

Executive summary

Key themes of survey

  • While ESG is a significant opportunity in the mutual fund industry, boards need more
    information
  • Directors recognize the benefits, but most are taking a passive approach to implementing diversity
  • Board culture is strong, but virtual meetings are taking its toll
  • Board members value self assessments, but recognize there are limitations

Mutual Fund Industry Expectations

An industry under pressure

More than half of directors expect fee pressure to be the most significant impact on the mutual fund industry over the next five years with product evolution a close second.

Q2: In your opinion, which trends do you expect will have the most significant impact on the mutual fund industry over the next five years? (select up to three)
Source: PwC 2021 Mutual Fund Directors Governance Survey, August 2021.

PwC Perspective

Downward pressure on fees and changing investor preferences compiled with inflationary pressures, increasing talent and real estate costs, and an ongoing pandemic deepens the challenge for asset managers.

PwC discusses tighter margins and a changing workplace in COVID 19 and the mutual fund industry: an acceleration of trends.

Directors characterize top industry disruptors as significant opportunities

Q3: Which of the following disruptions occurring in the industry, the economy and society, would  you characterize as significant opportunities for fund managers? (select up to 3)
Source: PwC 2021 Mutual Fund Directors Governance Survey, August 2021.

PwC Perspective

Beyond compliance: Consumers and employees want business to do more on ESG

For more information, including how business can close the expectations gap, refer to PwC 2021 Consumer Intelligence Series survey on ESG.

Bitcoin, cryptocurrency, blockchain… So what does it all mean?

PwC’s Making sense of bitcoin, cryptocurrency and blockchain gives an overview of blockchain and cryptocurrency as well as providing links to additional pieces for a deeper dive into these technologies.

Directors have upskilling to do on ESG

  • Less than half, 48% of directors, believe environmental or sustainability experience is an important competency of the board
  • With only 29% of directors who believe their board has a strong understanding of the ESG issues impacting the funds’ respective strategy and performance

Q5: How would you describe the importance of the following skills, competencies or attributes on your board?; Q17: Which of the following statements do you agree with about ESG? (select all that apply).
Source: PwC 2021 Mutual Fund Directors Governance Survey, August 2021.

Growing importance of ESG

More than 50% of directors agree ESG issues are linked to the advisor’s strategy and important to the funds’ shareholders.

Q17: Which of the following statements do you agree with about ESG? (select all that apply); Which of the following areas would you like to spend more time and focus on with fund management? (select up to 3).
Source: PwC 2021 Mutual Fund Directors Governance Survey, August 2021.

Directors want to spend more time and focus on the following with fund management

  • 60% Product innovation (e.g., Crypto currency products, ESG funds, etc.)
  • 41% Technology transformation, including expanding use of digital cybersecurity risks at the advisor and other fund service providers
  • 38% Competitive landscape
  • 34% Strategic business initiatives, including mergers and acquisitions

Q4: Which of the following areas would you like to spend more time and focus on with fund management? (select up to 3).
Source: PwC 2021 Mutual Fund Directors Governance Survey, August 2021.

Emerging regulatory areas, directors want to hear more about

Q20—Which of the following emerging regulatory areas do you want to hear more about from management or your service providers (including external legal and audit)? (select all that apply).
Source: PwC 2021 Mutual Fund Directors Governance Survey, August 2021.

More than half of Directors want more on ESG in anticipation of the SEC expected proposed rules on 1) creating uniform climate change disclosures and 2) standardizing ESG fund marketing and advertising.

Board Culture

Board culture is really strong

More than 70% of directors are saying:

  • Board meetings are characterized by a free/open exchange of ideas
  • Board members trust each other’s judgment and opinions
  • Shareholder interests are front and center of the board’s focus
  • The board spends adequate time on its own without management present
  • Sufficient time is allocated to discuss issues important to the board

Q6: To what extent do you agree with the following statements about your board’s culture? (select all that apply).
Source: PwC 2021 Mutual Fund Directors Governance Survey, August 2021.

Most directors don’t have critical feedback for their peers

Q7: Do you believe any of the following about any of your fellow board members? (select all that apply).
Source: PwC 2021 Mutual Fund Directors Governance Survey, August 2021.

How many directors on your board should be replaced?

27% of directors say that one or more directors on their board should be replaced

Q8: In your opinion, how many directors on your board should be replaced?
Source: PwC 2021 Mutual Fund Directors Governance Survey, August 2021.

Virtual meetings are more efficient, but there is a price…

Meetings are more efficient, but directors see the price as board culture (57%), meeting effectiveness (34%), director engagement (30%), and ability to challenge management (29%) are negatively impacted.

As 61% of directors expect virtual meetings to continue in some capacity, it’s worth boards’ time
to think about how to make improvements to the process now.

Q14: In your view, how has the shift to virtual board/committee meetings impacted the following?; Q15: Given the relative success of board meetings during the pandemic, how do you anticipate board/committee meetings will be conducted in the future? (select only one).
Source: PwC 2021 Mutual Fund Directors Governance Survey, August 2021.

Board Diversity

What is the effect of board diversity?

Directors recognize the benefits of a diverse board—it improves the discussion and board performance. They are less convinced that it benefits the fund itself.

Q9: To what extent do you agree with the following statements about board diversity?
Source: PwC 2021 Mutual Fund Directors Governance Survey, August 2021.

Impediments to board diversity

Nearly half (46%) of directors believe over reliance on director networks to source candidates is a reason boards have not become diverse more quickly.

  • 33% Long serving directors reluctant to retire
  • 46% Over-reliance on director networks to source candidates
  • 29% Lack of qualified candidates
  • 5% Fears that it will negatively impact board effectiveness
  • 28% Change in the board is not needed
  • 17% Board leadership not invested in board diversity

Q10: In your opinion, what has impeded efforts to increase board diversity in general (e.g. why haven’t boards become diverse more quickly)? (select all that apply).
Source: PwC 2021 Mutual Fund Directors Governance Survey, August 2021.

Directors are taking a passive approach to implementing diversity on the board

  • 16% increased board size to add a diverse director
  • 43% replaced a retiring director with a director who increases the board’s diversity
  • 5% Amended/modified the board’s succession plan to ensure increased board diversity in the future
  • 4% considered committee assignments to increase diversity of board leadership

22% of directors state their board has not taken action for board diversity in the past two years…

They agree that diversity brings benefits to mutual fund boards—are they doing enough to ensure that it happens?

Q11: Which of the following actions has your board taken over the past two years regarding board diversity? (select all that apply).
Source: PwC 2021 Mutual Fund Directors Governance Survey, August 2021.

Which director attributes are most important?

When asked which attributes are most important on their boards, directors emphasize broad executive management experience as well as industry and financial expertise above any other attributes.

Q5: How would you describe the importance of the following skills, competencies or attributes on your board?
Source: PwC 2021 Mutual Fund Directors Governance Survey, August 2021.

The Future of Work

Future of work: what directors anticipate

77% of directors believe the COVID-19 pandemic and associated business disruptions have not exposed any vulnerabilities at our fund complex, although agree the future of work will evolve

PwC Perspective

Our latest PwC US Pulse Survey: Next in work discusses a pivotal moment for the future of work, companies can help their businesses and employees thrive.

Q18: In your opinion, has the COVID-19 pandemic and associated business disruptions exposed vulnerabilities at your fund complex in any of the following areas? (select all that apply); Q19: Do you believe COVID-19 will have any of the following long-term structural impacts on the mutual fund business in general? (select all that apply).
Source: PwC 2021 Mutual Fund Directors Governance Survey, August 2021.

Board Self Assessments

Board reflection: self assessments

Q12: Regarding board/committee self-assessments, to what extent do you believe the following (select all that apply).
Source: PwC 2021 Mutual Fund Directors Governance Survey, August 2021.

Taking assessments seriously means changes but not in all areas or drastic measures

Boards are focused on improvement of the group as a whole, enhancing the experience, and diversifying.
Boards are less interested in removing existing members or providing counsel to individual board members.

Q13: In response to the results of your last board/committee assessment process, did your board/committee decide to do any of the following? (select all that apply).
Source: PwC 2021 Mutual Fund Directors Governance Survey, August 2021.

The complete publication, including Appendix, is available here.

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