Promoting corporate governance : an analysis on Maltese-domiciled SICAVs

Abstract

Collective investment schemes (CIS) are investment vehicles that collect funds from investors and invest them in various assets. Unlike corporations, the operations of a CIS are delegated to specialised service providers, who need to abide by the requirements and restrictions as imposed in the offering supplement. As evidenced by this study, relationships are one of the factors which have to be considered when appointing these service providers. The tool which controls the risks emerging from these agency relationships is corporate governance, which consists of internal processes, procedures, and internal relations. This study will delve into these processes with a focus on the three most fundamental areas of a CIS: the board of directors, portfolio and risk management. Semi-structured interviews with individuals who have experience in these areas were the main source of information. Directors are the ultimate body that is responsible for corporate governance. In the course of this study, it became increasingly evident that, the local funds industry is struggling to find suitable people. This shortage is also reflected in risk management, where risk professionals are very hard to come by. Eventually, this will cause the industry’s growth to weaken. When considering this issue, regulators should consider a time frame in which practitioners have enough time to adapt because currently compliance issues are being prioritised over performance. Directors are the direct line of communication between investors and management. However locally, this communication is quite poor, and more frequent meetings should be held, especially when considering the investors’ lack of financial education. Both demand and supply for Environmental, Social & Governance (ESG) - compliant investments are relatively low in the local scenario, so investment companies should take this opportunity to innovate their investment screening and promote such investments. Although currently, ESG-derived returns may not make economic sense, it is a matter of time before the industry will experience substantial growth. Lastly, regulators should be more aware of operational risk, especially when considering small CISs, because fees are making it more difficult to be adequately protected.