Alternatives Experience Wanted. Bullies, Boors Need Not Apply

In the Financial TimesBoardIQ today, Greg Saitz writes about the experience and expertise mutual fund directors are seeking on their boards. Graham Michener, head of our Financial Services Practice, recently spoke with Saitz, and his commentary is featured below.

This article appeared originally on May 5, 2015 in BoardIQ.

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Alternative investment experience is becoming an even more sought after skill for new fund directors, eclipsing regulatory, accounting and legal know-how, according to a new BoardIQ survey. And finding the right candidates can be challenging, as most potential directors fall out of the running because they lack expertise in key areas, the survey found.

The results, which show poor culture fit as another significant factor in disqualifying candidates, highlight the critical importance of selecting the right members so boards can provide effective oversight, experts say. Missteps can be painful for all involved, these experts say.

“It’s so important because a board is a small group of people and their ability to work together and be compatible is the key factor for success,” says Meyrick Payne, managing partner of Management Practice, which helps fund boards assess what skills they need in future members. “A director who gives orders and barks at people is not popular.”

What is popular these days are individuals who have experience with alternative investments. Fifty-three percent of survey respondents cited that skill as a desired area of expertise for new board members, the most among options presented. The BoardIQ survey garnered responses from 60 independent directors, fund officers and counsel, who could select multiple skill sets in their responses.

Regulatory expertise was the next most popular skill at 45%, followed by experience respondents could write in. Those included distribution, compliance, fund operations and risk management. Accounting, legal and academic skills were the least desired future areas of expertise.

“Most boards say, ‘I’ve already got enough lawyers,’” Payne says.

On the other hand, alts experience is undoubtedly the most popular competency boards are seeking, he says. At the end of last year, there were 621 alternative funds, including nontraditional bond funds, according to Morningstar data cited in a Goldman Sachs paper on the subject. Fund groups launched 98 new alt funds in 2014, two dozen more than the prior year, Morningstar data show.

“To understand [alternatives] as a board implies you understand the strategies of alternative investments and you understand the instrument of derivatives, and there aren’t necessarily a lot of directors who can do that,” he says.

Broad investment management experience, particularly in an executive or leadership role, also is something fund boards want, says Lee Hanson, vice chairman of Heidrick & Struggles’ San Francisco and New York offices who is conducting three separate fund director searches.

Candidates whose résumés include posts as an endowment chief investment officer or general counsel to investment management or financial services firms are especially appealing to boards, she says. Earlier this year, BlackRock added two independent directors, one of whom was CIO of Williams College and the other of whom held the same position at the University of Delaware, as reported. Wells Fargo also recently brought on a board member with CIO experience.

The desire for regulatory expertise from director candidates is something Graham Michener, head of the financial services practice at search firm RSR Partners, has noticed.

“The compliance/regulatory piece is exponentially higher than anything else we’ve heard,” Michener says. “Someone who knows how to deal with risk management.”

That skill may be essential as the Securities and Exchange Commission pursues an agenda chair Mary Jo White laid out for the agency’s investment management division that includes risk monitoring and other systemic issues.

Candidates who’ve successfully dealt with regulators during their career are looked at favorably, Michener says. But that doesn’t mean they have to have come from the asset management industry.

“I like to think mutual fund boards should expand their horizons and rely less on today’s investment community and look more to other industries that are highly regulated,” he says.

Finding the right skills is one part of a search for new directors but certainly not the only one, independent board members and experts say. It’s just as important to ensure a candidate can work effectively with others on a fund board, they say.

Although directors are not dealing with each other on a daily basis, they do gather four or more times a year for meetings at which much ground is covered.

“You spend a couple of days together, and after a while the group melds and you have a cohesive group,” says Daniel Hanwacker, an independent director at City National Rochdale Funds. He adds, “You put six people together – everybody is not going to get along all the time. But you harken back to why we’re here. We’re here for the shareholders.”

Ensuring the right cultural fit “is probably the hardest thing,” says Hanson from Heidrick. When directors fail on a board, it’s usually not because they lack the experience but because they don’t have enough time or don’t mesh behaviorally – they’re either overbearing or, conversely, afraid to speak up, she says.

To avoid hiring the wrong directors, fund boards and search consultants do lots of reference checking of a candidate’s life serving on other boards and spending time with the person, Hanson and others say. Many times, the full fund board (as opposed to the nominating committee) will meet with a candidate over breakfast or lunch to see how the person interacts with the group, experts say.

Closed-mindedness or not being open to new ideas also should be warning signs, Michener says.

“We like to test for that when referencing,” he says. But “human nature is a tough thing to control. Oftentimes, people get into the boardroom and their temperament, their nature can change.”

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