Nearly 64 per-cent of market participants involved in Irish corporate governance do not believe directors should have a professional qualification, while 37% said it was unnecessary for directors to have continual professional development (CPD), according to a survey by KB Associates, a boutique consultancy.
This comes as the Central Bank of Ireland (CBI) has issued several consultations on corporate governance at investment funds. One CBI paper – “Fund Management Company Effectiveness – Delegate Oversight – also known as CP86 said directors should not be spending in excess of 2000 hours per year on fund boards. The CBI said it would be scrutinising how much time directors spend on their commitments amid concerns some individuals are over-capacity. The CBI also said it would retain the requirement for funds to have at least two resident Irish directors on boards.
“One of the consequences of the financial crisis has been a focus by regulators and investors on the governance structures in financial services, be it banks, asset managers, insurers or collective investment schemes (CIS). All of these organisations are in the spotlight. In regards to Irish investment funds, there is debate as to whether the rules being considered represent an appropriate level of oversight or are potentially excessive,” said Mike Kirby, founder of KB Associates, speaking at a KB Associates breakfast briefing in London.
Corporate governance has been in the spotlight in the onshore and offshore world for several years. The Weavering Capital scandal is now a byword for corporate governance shortcomings, while the behaviour of many directors during the crisis still irks institutional investors. Many directors were accused of failing to act in the interests of investors, while others were found to be perilously underqualified or stretched beyond their means.
Some vocal investors have advocated caps on the number of boards to which directors can sit on. Mandatory caps have caused divisions. While some directors do sit on a copious number of boards, these individuals highlight that they enjoy considerable support from their associates and staffers. This model, they argue, is simply a replication of how major accountancy and law firms operate.
Fund strategy should also be taken into account. A director would probably have an easier time sitting on the boards of 50 North American long/short equity hedge funds than being a director at 10 funds specialising in illiquid, hard-to-value Level 3 assets or bespoke over-the-counter (OTC) derivatives.
A hard and fast cap would also mean directors’ fees could increase substantially. Given the heightened operational and regulatory costs facing managers in this low return environment, such a scenario would not be welcome. However, many managers do offset directors’ fees to their funds. Again, some institutional investors may be loath to pay the additional expenses on top of their management fees.
Perhaps most significantly is the diversity of the board. “Most directors will have a broad range of skills covering accountancy, law and custody. But there is a big gap insofar as there are very few directors with explicit investment management or risk management expertise. We would like to see more directors with experience of investment strategy,” said one fund of hedge funds, speaking anonymously.
Others said that some investors viewed fund directors as quasi-operational due diligence figures. “There is a risk among some investors of turning non-executive directors into executives. Non-executives are there for guidance rather than overseeing the day-to-day management of the fund. These individuals should be working for the investors not the managers,” said one consultant.
Institutional investors have made it no secret they will veto managers where corporate governance is found wanting. Strong criticism around governance standards has been levelled against offshore jurisdictions such as the Cayman Islands. In 2013, a study by the Cayman Islands Monetary Authority (CIMA) in conjunction with Ernst & Young (EY) found just 11% of investors felt corporate governance was fit for purpose while 71% said massive improvements were needed.
This has prompted regulatory authorities to act. CIMA introduced guidance in 2014 for directors operating in the jurisdiction. The Directors’ Registration and Licensing Law applies to any director of a Cayman Island domiciled mutual fund or hedge fund and required them to register with CIMA. This enhanced oversight is designed to allay investor concerns about the perceived lack of regulation of directors in the Cayman Islands. CIMA now subjects directors to regulatory inspections.
CIMA also published a Statement of Guidance in 2014, which outlined the standards directors must adhere to. It requires minimum standards around skill-sets, independence, disclosure of conflicts of interest and service provider engagement. The provisions do represent a major improvement although some allocators feel it does not go far enough.
These investors have called for an accessible, online database in the Cayman Islands containing details of directors and the boards they sit on. Lawyers highlight, however, such a database would breach confidentiality laws. As such, it is unlikely to materialise anytime soon.