According to research, a typical board director in the Luxembourgish fund industry is a 53-year-old European man with 22 years of work experience (who probably plays golf). Their role is to ensure investors avoid the rough and get to the green safely.
Failure results in a penalty stroke from the CSSF.
Penalties
On April 6, 2022, the CSSF issued a €365,000 fine to a local institution for failures in the functioning and responsibilities of their board of directors. Apparently, there were also some issues with conflicts of interest. Even though no investors were harmed, it is best to avoid this bunker.
To help stay clear of the regulator, the industry is leaning on guidelines issued by ALFI. This requires them to appoint boards with a broad area of expertise, ranging from ESG to risk management, but also encourages them to diversify board composition in terms of age, ethnicity, and gender.
It appears quite a challenge to form the ideal board.
Given that most funds in Luxembourg require a board with several directors and we have thousands of funds, it is next to impossible to appoint a board that has the experience, diversity, skills, and time to oversee complex fund structures and ensure that investors’ interests are protected.
There are simply not enough qualified people.
Qualifications
The shortage is simple to explain: the main qualification to be a director is experience, and there are not too many people with relevant experience. Something that is to be expected in an industry that is relatively young, always evolving, and niche. Only time will produce more experienced candidates.
Even though experience trumps knowledge when it comes to being a director, there is still plenty of room for candidates who are younger and not male. A good board is diverse. These candidates, though, should be trained, and a good way to do so is getting ILA certification.
Time
In the meantime, to make up for the shortage, boards are being staffed by directors who sit on multiple boards simultaneously. This has led many to question whether a director is capable of overseeing so many companies all at once.
The CSSF has doubts about this practice and has stipulated that a director cannot sit on more than 20 regulated boards simultaneously, and their engagements cannot exceed 1,920 hours per year. They appear to be unsure that a director can protect investor interests with so many commitments.
Although it would be similar to comparing apples and pears, we could take a look at how much time an auditor spends reviewing a company versus a director. The answer is that auditors spend more time and resources on reviews than directors and still fail to find red flags in a company.
This begs the question: Are directors doing enough to protect investors? Overall, YES, we have some very talented professionals and strong regulatory oversight procedures, which ultimately ensure that investors’ interests remain at the heart of our industry.
Not everything is perfect, though. Some directors are probably not spending enough time on each mandate, and most boards are not benefiting from the differing perspectives diversity offers. Even so, we successfully steer investors away from hazardous waters and onto the green.
Gregory Kennedy is a columnist for Investment Officer Luxembourg. His columns appear on Wednesdays. He also works as a business development manager at Finsoft Luxembourg.
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