The purpose of this article is to address the governance issues that arise within financial institutions, in particular wealth managers and institutional asset managers.
Both are subject to direct or indirect prudential supervision by FINMA. In the case of limited companies, shareholders appoint the Board of Directors, which in turn appoints the Executive Committee.
As regards institutional asset managers, FINMA requires in all instances the presence of independent directors on the board; also, FINMA may require of wealth managers that they appoint independent directors, depending on criteria that it itself determines, such as size, business model or the percentage of high-risk clients.
Most asset managers are small companies; according to FINMA, the median assets under management lie around CHF70m; this means that 50% of asset managers manage less than that amount. The same persons will often be found among the shareholders, the board of directors and the executive committee. This raises the question of the limit to their respective roles, further raises questions regarding conflicts of interest, and only reinforces the need for independent directors.
Both the members of the board and those of the executive committee are subject to prior approval by FINMA. In addition, FINMA requires that Organisational Regulations be drawn up, outlining in great detail the responsibilities of each of the governing bodies. While the board is naturally responsible for the company's overall governance and for appointing the executive committee, it is also tasked for instance with approving financial planning and budgeting.
In reality, the relationship between the two bodies varies considerably. In the case of micro-businesses employing one or two people, one will sit on the board and the other on the executive committee; since in practice they work together running the business on a daily basis, the result is akin to a type of management similar to that of a limited liability company, run by a partnership.
On other occasions, shareholders appoint themselves as directors and entrust management to people close to them, for example members of their own family. This raises the question of the actual supervision exercised by these directors, as well as that of their independence, if any.
More generally, the degree of involvement of directors, whether independent or not, who genuinely supervise management and hold it to account, is the key to good corporate governance. Regretfully, some directors, whether out of ignorance or laziness, decline to be so involved and rest content with ratifying decisions that have already been taken elsewhere.
A strong personality who dominates the board may also sometimes weaken its effectiveness. The author was once present at a board meeting where the CEO, who was also a shareholder and director, first spoke for fifteen minutes and then handed over to the chair, saying "I now leave it to the Chairman to open the meeting". The reason this particular CEO had so much to say was a reflection of an undue, but real, parallel governance run by him alongside his founding shareholders, who wrongly see themselves as partners.
In the last century, the former Belgian Prime Minister Paul-Henri Spaak wrote that "the King must exercise the powers granted to him by the Constitution, no more and no less". The same applies to the board of directors; this requires its members, especially the independent directors, to be competent in matters of corporate governance and compliance, diligent in studying the agenda and to show the strength of character necessary to stand up to management. Ultimately, the role of the independent director is to serve the company within the framework of the law, to ask the right questions and to speak the truth.
About the Author
Dominique de la Barre (LinkedIn Profile)
Member of the Management Board, Chief Risk and Compliance Officer, DCM Systematic SA (50%) - Rhône Gestion (50%) ; secretary to the Board of Directors. IMD: Mastering Board Governance (2022).
