ILA Directors' Day 2021

Summary Articles

 

ILA: growing numbers and wider scope

Around 300 people attended the 10th ILA Directors’ Day: 200 in person, and 100 online. It featured the traditional mix of Luxembourg-governance topics, and broader thought-provoking themes. 

“ILA continues to grow,” said the Institute’s Chair Carine Feipel, highlighting membership in excess of 2,500. Training and knowledge-building remains a central role, and there are now 163 members with ILA’s flagship certification, plus 66 certifications of company secretarial and governance expertise. To this can be added the more than 3,000 people participating in 67 training courses and 33 conferences last year. 

ILA’s recent actions included new programmes (such as the Forum for Directors of (re)insurance Undertakings), five new or updated publications, lobbying activity (e.g., on the scope of AML law and guidelines for directors) and the signature of the Charte de la Diversité Lëtzebuerg.

Carine gave more details about the work on AML, how ILA interacts with the authorities to clarify what is expected of directors, and information sessions for members. “About 200 of our members attended a presentation recently with a representative from the Ministry of Justice who introduced the guidelines that they have just issued. “It's important that all of you understand into which category you fall, and that if you are in scope, you must to what is needed to be compliant. In ways such as this, ILA will work to ensure Luxembourg meets high standards regarding AML,” Carine added

She also highlighted ILA’s Sustainability Competency Assessment Tool: “This is useful if your board wants to assess how good it is on ESG and sustainability topics.” As regards the Diversity Charter, she is pleased that ILA is one of about 230 organisations to have signed it. 

“Working committees are the backbone of ILA,” Carine noted, pointing to the 24 committees run by 200 members, which produce and inspire many of the Institute’s brochures and events. Thanks were also given for the support of the “absolutely essential” ILA team. 

For the future, she highlighted plans to increase ILA’s digital capabilities, a planned user experience study, and a new fund certification programme for 2022, which will see two one-week programmes. Work is further on-going about a position paper regarding director independence, and a training programme on artificial intelligence is planned. There was finally the reminder that the next Director’s Day would be on 17th November 2022. 


Claude Marx interview

The interview with CSSF Director General Claude Marx rounded off the conference, with questions posted by ILA Chair Carine Feipel and ILA board and management committee member Frédéric Mouchel. The discussion began with a round up how the regulator continues to deal with Brexit and the pandemic, before turning to other on-going regulatory hot topics.

Brexit expectations

On the “lose-lose” situation that is Brexit for Mr Marx, he reminded the conference of the many vital connections that still exist between the EU and the UK, be it clearing, risk management or portfolio management. He said much of this expertise can’t be replicated on the European mainland at short notice.

As for operations that have moved into the EU single market via Luxembourg, Mr Marx underlined that remote working cannot be the answer. “People could have the idea that substantial numbers of staff could telework from the UK into Luxembourg companies, but this would be cheating on the arrangements between the European Union and the United Kingdom,” he said.

Permanent, structural changes are required. Mr Marx pointed to around 40 newly CSSF-regulated companies having moved to Luxembourg due to Brexit. To this can be added several insurance and reinsurance operations which are under the supervision of the CAA. However more significant in terms of employment: “we also had existing firms seriously beefing up their operations in Luxembourg,” he added. As well, 122 UK-based companies have applied to operate in Luxembourg as third country firms, by which the CSSF recognises these companies as operating under a regulatory regime equivalent to that of the EU. Most of these applications have been accepted he said.

Pandemic and remote working

“Extraordinarily resilient,” is how Mr Marx characterised the financial sector’s reaction to the pandemic. “We had zero serious operational incidents, despite the fact that in the first week of the pandemic people had to work from home and nobody had this to such a large extend in their business continuity plan,” he said. Moreover, now bank balance sheets are up 10% on pre-crisis levels, despite the number of banks declining as the industry continues to consolidate. As well, net fund assets under management are at a record level, with Mr Marx forecasting “a good future” for the sector.

Pandemic-related remote-working drove the regulator to introduce a specific circular (21/769), even if the rules will not begin to apply while pandemic conditions persist. Yet Mr Marx called on directors to ensure their companies will be ready when restrictions are lifted. “It is clearly the duty of the board of directors to control the rules and ensure sufficient, internally visible documentation,” he said, adding “now is a good time to prepare as there is an expectation from staff that teleworking will be available in the future.”

Mr Marx commented that substantial consultation work had gone into this circular, reminding the conference that “we are dealing with a heavily regulated sector, including requirements for privacy and data protection.” Hence why although teleworking will be an important tool for managing teams, “it needs to be organised in a very well thought through manner” in terms of organisation, IT security, substance and control. He emphasised the importance of ensuring sufficient substance for regulatory, tax and social security considerations.

ESG regulation expectations

On ESG regulation, he suggested businesses should do all they could, but should not be overly concerned about things outside of their control. Mr Marx reminded the conference that relevant EU law is relatively new, not finalised yet, and that rules are often extensive. “Map out what is coming and what will be applicable and when, and then work to implement the relevant aspects, and do this as well as you can with what is available,” he advised. He recommended moving quickly to put systems and teams in place as deadlines are pressing, before adding “but what you cannot do, you are not expected to do.” He also highlighted the need for training, for boards, management and relevant teams including control functions, sales staff, administrative staff, and more. He had specific praise for courses run by ILA.

Generalised long-form reporting

The use of long-form reports is to be generalised. At the moment UCITS and Part II OPCs are required to complete these, but vehicles used for alternative funds, fund managers, and ManCos are exempt. He called this an “artificial divide”, saying that over the next 18 months this procedure would be generalised, if tailored to each sector. He recognised that completing these forms for the first time is a somewhat onerous process, but that subsequent updates are more straightforward, adding that digital forms are designed to streamline these procedures. “Moreover, it's a useful instrument for a board of directors to have reassurance that everything is in place as it should,” he added.

Director suitability reminder

Mr Marx reminded the audience of rules around the suitability of directors, principally in the revamped circular 12-552. He added that diversity is also a key part of the ESG agenda. “Please be aware that there are requirements on gender diversity at the level of the executive team and the board,” he said, and that Luxembourg has ground to make up on this score. “It is an obligation to have a plan for significant institutions, and some of these are not what we expect to see,” he said.


SPAC mandates – a strange animal?

There are about half a dozen Special Purpose Acquisition Companies (SPAC) in Luxembourg, so what are the particular challenges when considering a directorship mandate? This was discussed panel chaired by Virginie Lagrange (a Luxembourg-based independent director and ILA board vice-chair) in conversation with Bob Calmes, a partner with Arendt & Medernach, and Stefan Winners, Ex-CEO, Lakestar SPAC I. 

A SPAC raises funds with a view to making largely undefined equity acquisitions of private or public companies. Sponsors can be PE and VC funds, businesses or individuals, with other investors then sought. For targets, it is an alternative to an IPO. Typically, the SPAC will target one company. If an acquisition is not made by the SPAC after two years, then investors have their capital reimbursed, but the sponsors will lose part of their investment. 

Bob said there are about six or seven SPACs in Luxembourg, and around 25 in Europe, but that this is a fraction of the number in the US. The choice of domicile often depends on tax, cost and strategic preferences, with the Grand Duchy competing with the likes of the Netherlands in the eurozone. If they chose Luxembourg, the SPAC will often want resident directors.

Asked about the challenge of being a SPAC director, Stefan said it is a much less risky mandate from an operational point of view, but strong on-going due diligence was required. “If you have good partners, if you have good lawyers, if you have a good service company, good auditors, then it's much easier than listed companies which have to comply with a lot of regulations,” he said. 

However, he noted that difficulties can result regarding expectations around the target, both in terms of the nature of the acquisition and the valuation of the investment. “A lot of SPACs in the US have bought companies very fast, at very expensive prices and 80% are trading below the purchase price. A lot of investors are not very happy with this situation,” he said.

“If you are an independent director, very often you would also chair the audit committee. And the law is quite clear in saying you have to have somebody on that committee who has knowledge on the underlying industry,” Bob noted. This can be tricky if a SPAC is broadly focused. Virginie agreed, pointing to the potential for differing goals and potential conflicts of interest from different sponsors, investors and directors. 

She underlined how she valued the directors and officers liability insurance she has to cover her work especially on a SPAC board. However, Stefan warned that: “at the beginning, D&O insurance was easy to acquire, today you hardly get any, even if you have an outstanding management team.” This requires the board to be highly professional he said. Bob agreed, pointing to a couple of dozen class action law suits on-going in the US, although nothing like this has yet happened in Europe. “Disputes tend to be about claims of incorrect disclosure or misrepresentation, and very often regarding underlying technical data on the target,” he said.

For a successful SPAC mandate, Stefan said it was vital to analyze the team you would be joining, and ideally that there is sufficient capital to give the SPAC the flexibility and independence it needs. Virginie highlighted the need to check the sponsor’s track record. These caveats aside, sitting at a SPAC board gives opportunities to work on interesting projects with a diverse range of people.


The State of Luxembourg boardrooms - insights from the ILA-Diligent survey

An overview of the local corporate governance scene resulted from a survey of Luxembourg boardroom practice conducted over the summer by ILA and board software provider Diligent. The report features data from around 100 directors, executives and corporate secretaries from various industries. A panel chaired by independent director Jane Wilkinson analysed selected results.

A central focus was on governance and risk frameworks, and how boards structure their activities in relation to these. The temperature was taken on board effectiveness, of how effectively in-house rules and guidelines are followed. Another aim was to identify corporate goals and emerging topics. “We wanted to highlight what's going well in Luxembourg, to give us a roadmap for the implementation of good governance,” Jane said.

“I was positively surprised to see that 93% of boards surveyed have frameworks for governance and risk policies,” Jane said. Fellow panellist Monique Bachner, also an independent director, agreed but said this could be a question of how these frameworks are defined in each business sector concerned. “About 70% of the respondents were from the financial sector, so the frameworks here will be different from operational companies. But even so there is convergence,” she said. Larger companies will tend to have more clearly identified frameworks, and sometimes these are detailed in different documents rather than in a single place.

Asked about their top three corporate purpose goals, around 60% stated the desire to be a sustainable business over time (in the broadest sense of the word). Around about half wished to increase operational efficiency, efficiency and maximise profit, with the third highest priority being to set standard and be a role model for reliability and quality in their sector. Yet, 46% of boards do not conduct formal performance evaluations, or only infrequently, making it harder to assess if these goals are being reached. As regards environmental sustainability, two-thirds think their boards lack the skills to assess these challenges fully – indicating the need for various initiatives and training programmes launched by ILA in this area.

Boards are supposed to drive corporate strategy, and three quarters said they discussed and evaluated key business strategy annually. Yet on closer examination, the survey found that, on average, about half of board time was spent on operational topics, with some reporting as much as 80%.  Monique observed that as many respondents were investment funds “we would expect them to be having more of an oversight role than a strategic role,”

With only half of boards think they have the right balance between addressing long and short-term goals, more focus on Agenda-setting and balance seems required.  Perhaps related to the pandemic situation we are still in, a quarter reported spending almost all their time dealing with immediate matters.  The panel noted that many boards had to change their focus during the pandemic, as simply keeping businesses running through the crisis required special attention.

For Edna Frimpong, Head of research at the Diligent Institute, this lack of strategic focus can also be due to directors not receiving board reports in an efficient manner. “Time can be swallowed by passive listening to departmental reports that could have been read beforehand. Circulating these documents before meetings enables directors to highlight the most important topics”.

As a follow-up to the report (due to be published in December), ILA will organise events to explore and discuss these and other themes. 


Sport & ESG - what lessons can the sports ecosystem provide directors?

“Sport is more than just a nice-to-have, something fun and exciting, there needs to be sustainable positive impact for society,” said Steven Mann, director of the sports consultancy 4global. He explained how the search for a sustainable economic, environmental and social legacy accompanies the hosting of events such as the Olympics and the football World Cup. In so doing he highlighted potentially new ways of thinking for others considering meeting their own sustainability goals.

“In many ways, sport has been ahead of business when seeking sustainability,” Steven said. While these themes have only more recently become hot, central topics for the financial and corporate sectors, sports administrators have been grappling with these considerations for decades. The expenditure of public resources has driven organisers to focus on providing measurable positive impacts for communities.

A barrier to achieving these goals, Steven said, was the frequent disconnect between city planners and games planners. “Too often cities feel these events are delivered to them, with the expectation that they should simply deliver success,” he said. He argued that a city needs to feel part of the decision-making process, so it can fully work to mobilise support from across the community.

He cited the case of a project working with the city of Lima which hosted the Pan American Games. A central goal was to boost the engagement of the majority of people who are not particularly excited about such events. They sought to mobilise this support by highlighting the benefits in terms of physical and mental health, both in human but also financial terms. It was also used as a vehicle to promote community spirit through volunteering.

After this presentation, the audience were then asked to put some of these ideas into practice through an interactive game, in which they played the part of the International Olympic Committee deciding where to host the 2036 games. Factors such as the sporting, financial, social, infrastructure, and economic implications were pitched to the audience, and on this basis a choice was taken. It was a light-hearted session, but which raised numerous ESG and governance questions. 


A journey to Sustainable Governance

European Commissioner for Justice Didier Reynders addressed the Directors’ Day via video link from his Brussels office. As well as giving details of the latest thinking about corporate governance regulation within the EU, Mr Reynders’ virtual presence underlines how policy makers and regulators increasingly value the work of directors to meet public policy agendas. He was interviewed by Sophie Öberg, deputy director of IMS and co-chair of ILA’s Sustainability Strategy for Boards working committee and Karen Wauters, non-executive director, chair of ILA’s Board Organisation and Effectiveness working committee.

Mr Reynders described how at the EU level; directors will be expected to help with the drive towards the continent becoming climate-neutral by 2050. The European Green Deal will represent about one-third of the €750bn Next Generation EU package, and he said, “as well as working on the demand side with consumers, we also need to work on the supply side with companies.”

Specifically, this would concern impact assessments, and to achieve this he wants to work with corporate governance professionals on their sustainability processes. “This would be about asking companies to put into place due diligence systems to verify the possible negative impacts of their operations and those of their supply chain,” he said. This would concern climate change, but also questions such as biodiversity and human rights, such as the use of forced or child labour.

He said he understood the need to avoid the duplication of procedures where possible. Hence any new measures would be aligned with the existing corporate sustainability reporting directive. A local agency would be mandated in each member state to implement the directive, but a common approach would be sought, including regarding potential sanctions.

The initial focus would be on larger companies and those working in the most high-risk sectors, he said. “Part of the initiative would be dedicated to director duties, with a focus on requesting evidence of a duty of care regarding a more sustainable approach for the company, with discussions about medium- and long- term strategy to including how to help achieve climate neutrality by 2050,” he said. There will be discussions of how remuneration could be linked to these aspects.

He said new regulations were unlikely to come into force before 2025, with him hoping to see legislation being approved over the coming 18-24 months. “This will give some time for companies to come forward with different solutions for the due diligence processes,” he said.

In a Q&A session, Mr Reynders was asked about enforcement and director liability. “I would like to see administrative supervision that compares to the market surveillance mechanisms within GDPR,” he said. It would be a question of civil rather than criminal liability, he added. Asked about the risk added regulation putting Europe at a disadvantage regarding other regions, he said he was aware of the need for a level playing field. However, he spoke of the possibility of a new European framework becoming a global system, much as how GDPR is being adopted worldwide.