Key Governance Developments - July 2019

Poor governance exposed by liquidity issues at European funds 

Despite legislative measures in place at the national and European levels designed to ensure adequate governance of investment funds - including oversight independent of a fund's manager, promoter or service providers - cases over the past month highlighting problems with illiquid assets suggest that the requirements may be observed more in theory than in practice. Following the suspension of the UK's Woodford Equity Income Fund, run by high-profile manager Neil Woodford, details have emerged of the fund's flouting of the spirit, if not the letter, of UCITS rules on liquidity of assets. Meanwhile H2O Asset Management, a subsidiary of France's Natixis, has been accused of maintaining poor risk controls. The firm held large holdings of bonds from companies linked to a controversial German entrepreneur, whom H2O had rescued from financial distress with investments at least twice over the past three years. The cases have highlighted not only issues in enforcement of fund rules, but whether governance structures are genuinely fulfilling their role of protecting investors.

Commission rejects UK regulator’s claim that UCITS rules led to Woodford fund problems

The European Commission has rejected claims by Financial Conduct Authority CEO Andrew Bailey that loopholes in EU rules were the cause of liquidity issues at Neil Woodford's Equity Income Fund. The Commission says the problem lies not with the UCITS regime, which requires at least 90% of a fund's assets to be listed on a public exchange, but the failure of UK regulators to apply the rules properly. The Woodford fund technically avoided breaching the limit on unquoted assets by listing holdings on the Guernsey-based International Stock Exchange.

Best source: Expert Investor

UK regulator under pressure for obliging Woodford to outsource compliance to Link

The UK's Financial Conduct Authority is reported to have pressured Neil Woodford in 2014 to engage as an authorised director of governance service provider Link Asset Services, which the regulator is now investigating over its role in the suspension of Woodford's flagship fund. The FCA recommended the firm, then known as Capita Asset Services, even though it had previously been censured for its role in the collapse of the Arch Cru and Connaught Income funds. Authorised directors are responsible for ensuring funds are in compliance with regulations and avoid exposing investors to undue risk.

Best source: Financial Times (subscription required)

International regulators examine big fund groups’ grip on corporate voting rights

The US Federal Trade Commission, the Department of Justice, the European Commission and competition commissioner Margrethe Vestager are examining the role of BlackRock, Vanguard and State Street Global Advisors in corporate voting rights. The three fund managers will soon hold four of every 10 votes cast at large US companies, partly as a result of the rapid growth of their exchange-traded fund ranges. There is concern that big shareholders will not drive companies to compete against other firms in the same market or sector in which they are also investors.

Best source: Financial Times (subscription required)


Japan rewrites merger rules to protect minority shareholders

Japan's Ministry for Economy, Trade and Industry has published the first of three sets of changes to the country's mergers and acquisitions guidelines. The rules give more protection to minority shareholders, and are designed to curb conflicts of interest ahead of an expected increase in management buy-outs and companies absorbing their listed subsidiaries. The Tokyo Stock Exchange is joining the government in efforts to reduce the number of listed subsidiaries controlled by parent groups Hitachi and Toshiba, and may eject small or badly-run subsidiaries from the exchange's First Section board.

Best source: Financial Times (subscription required)


Financial regulator warns on fund hosting governance and risk issues

The UK's Financial Conduct Authority says it has significant concerns regarding governance and risk management at companies offering regulatory hosting services to fund managers. The regulator says a sector review has uncovered weak or under-developed governance arrangements, as well as a lack of effective risk frameworks, internal controls and sufficient resources at hosting providers.

Best source: Reuters

Irish opposition set to block repeal of banker bonus tax

Irish opposition party Fianna Fail says it opposes the government’s parliamentary initiative to abolish the punitive 89% tax on bankers' bonuses, introduced in 2011 after the financial crisis. However, the government can remove the €500,000 cap on bankers' ordinary salaries without seeking parliamentary approval. Around 23,000 staff at Allied Irish Banks, Bank of Ireland and Permanent TSB, rescued and nationalised after the collapse of the country's domestic banking sector in 2008-09, are affected by the remuneration restrictions. The three banks now complain that the caps affect their ability to recruit senior executives.

Best source: The Times (subscription required)


ESMA to set out guidelines for MiFID II rules on periodic auctions

The European Securities and Markets Association does not intend to restrict periodic auctions, despite criticism that the technique of allowing fund managers to trade large blocs of shares while limiting order information violates MiFID II transparency rules. The regulator says it will only issue guidelines on how the auctions can comply with MiFID rules on price formation and transparency.

Best source: IR Magazine

Forty-two countries sign global governance framework on AI development

OECD member states have agreed a global governance framework for artificial intelligence, a milestone in governments’ efforts to tackle the practical and ethical implications of the fast-evolving technology. The OECD’s non-binding principles are the first to be adopted by a significant number of countries, including non-OECD members Brazil, Argentina and Romania. They focus on respect for human rights and democratic values in the development of AI, as well as providing protection for people affected by decisions made by AI algorithms.

Best source: Financial Times (subscription required)


Nissan and Renault settle governance dispute that blocked Fiat-Chrysler deal

Nissan Motor and Renault have found a solution to their differences over corporate governance at the Japanese carmaker. Nissan will now allow Renault’s CEO Thierry Bolloré to join its board and stop blocking merger talks between Renault and Fiat Chrysler. Nissan and Renault each hold significant shareholdings in each other, and the Japanese group had threatened to use its voting rights in Renault to block important decisions, causing the merger talks with Fiat to collapse and stalling management changes at Nissan.

Best source: Wall Street Journal (subscription required)

See also: Financial Times (subscription required)


Shareholders to vote on UK supermarket Sainsbury’s bonuses after failed merger 

Shareholders in Sainsbury’s, one of the largest supermarket operators in the UK, will vote on executive bonuses at the company’s AGM this week. They may vote against the proposed remuneration packages after Sainsbury's shares fell heavily when a proposed merger with rival Asda was rejected by the Competition and Markets Authority. CEO Mike Coupe may not be entitled to this year's proposed £3.9m pay package, including bonuses, if shareholders vote against the motion.

Best source: Retail Gazette