Governance, directorships and board structure in collective investment schemes : an analysis on the relationship between boards of directors and fund managers in Maltese-domiciled SICAVS

Abstract

Apart from retail funds such as UCITS, SICAVs are typically structured to assign no voting rights to investors. Indeed, voting rights are usually retained by the promoters in the form of founder shares, giving them exclusive power to hire and fire directors, who in turn, have the power to appoint the fund manager. However, should a CIS be third-party managed, directors also have a duty to monitor the fund manager for the benefit of shareholders, who are often the same entity which appoints them. Nonetheless, directors may act in the interests of the fund manager, rather than the SICAV, similarly to how regulatory agencies are subject to regulatory capture. Thus, this work has termed this theory director capture. Besides the promoter’s power to hire and dismiss directors, there may be other reasons why directors concur with fund managers, mainly, personal acquaintances, lack of understanding in fund trading, as well as psychological and social pressure on independent directors. These latter types of pressure are collectively termed the outsider effect, and manifest themselves in situations wherein promoters with experience in asset management, sometimes more than the local industry itself, and who have managed millions in AUM throughout their career, have set up and are managing SICAV, only to be forced to work with a stranger whom they are paying to create ‘obstacles’. Social factors such as nationality and employment history further contribute to the outsider effect. This dissertation contributes to the already existing literature on CIS governance by interviewing 17 individuals who are involved in the local funds industry in a myriad of ways thereby providing information on the outsider effect. It has transpired that such compliant behaviour takes place even locally. This study concludes by bringing forward recommendations following the results of these interviews.