Irish funds behind US independent directors to fight investors’ corner

Ireland’s position as one of Europe’s top locations for investment funds is lagging way behind the US in terms of corporate governance, according to a leading credit ratings agency.

Fitch says Ireland performs poorly when it comes to independent board directors who can challenge managers making decisions on other people's money.

The ratings agency looked at a sample of 854 European fund directors from 145 sub-funds in Ireland and Luxembourg, which together are the domiciles for more than half of the €8.35 trillion of assets held in European mutual funds. It found that only 44 per cent of directors in Irish funds are independent, compared to 75 per cent in the US.

Still, Ireland compares favourably against Luxembourg, where 29 per cent of mutual funds have independent directors, according to Fitch.

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“Fund boards are required to put the interests of investors above those of the asset manager,” said Fitch. “Their limited independence may therefore become more of a risk as the role of European fund boards grows.”

The report comes as Dublin and Luxembourg are vying to increase their dominance of the European mutual funds market following the UK's decision to exit the European Union. It also occurs against the backdrop of increased regulatory focus on the functions of fund boards.

The UK is the third-largest market in Europe, with more than €1 trillion of Undertakings for the Collective Investment of Transferable securities (Ucits) assets – a third below Ireland.

The role of directors of funds came into sharp focus last year when a number of UK commercial property fund boards decided to temporarily halt investor redemptions as a flurry of individuals and institutions sought to retrieve their money in the wake of the Brexit referendum. The moves were designed to stave off asset fire-sales to meet investors’ demands.

“One of the most important roles of fund boards is to determine investors best interests,” said Fitch. “They can include the decision to limit liquidity, ie by applying fees or redemption suspensions. It involves balancing the needs of existing and remaining investors with investor needs for immediate liquidity in markets which may not enable funds to achieve target prices for asset sales.”

The low level of independent directors on European fund boards compares with a 61 per cent rate on the boards of the FTSE 250 index of London-listed companies and 84 per cent on the S&P 500, a key US equities market index, according to Fitch. Fitch also found that almost half of Irish and Luxembourg funds have no women on their boards, while a further 39 per cent only had one.

The extent to which individuals, typically lawyers or accountants, act as independent directors on scores of companies has also come under the spotlight of regulators in recent years. A Central Bank review in 2014 found there were more than 2,000 active directors across Irish funds, with 13 individuals holding 652 directorships between them – the equivalent of 50 each.

The Central Bank decided the following year to monitor directors who work at least 2,000 hours a year – based on a nine-hour day and 230 working days per annum – who have seats on at least 20 boards. A spokeswoman for the bank declined to comment on the Fitch report.