Originally published in the HFM Week Guernsey Report, 2009, distributed May 2009
Corporate governance is an essential mechanism in enabling companies to minimise their risk of corporate failure, says Martin Tolcher of Legis Fund Services.
Corporate governance was defined by Cadbury in 1992 as 'the system by which companies are directed and controlled'. In this context, 'system' means both the structures that companies put in place (in particular, the composition of boards) and the processes they use (for example, regular board meetings, efficient information flow and accurate minutes).
Good corporate governance is an essential mechanism in enabling companies to minimise their risk of corporate failure – one only has to think back to the 1980s and the Robert Maxwell pension fund scandal to realise the catastrophic impact that such failure can have. More recently, the Enron situation arose, despite appropriate corporate governance structures being in place, because the board of directors did not robustly challenge questionable accounting and disclosure practices. Even more recently, many observers have blamed the current global banking crisis on poor corporate governance, citing the boards' inability to monitor risk management adequately, among a number of issues.
By demonstrably adhering to high standards of corporate governance, companies can mitigate these risks and, in the case of offshore funds, there are a number of stakeholders to whom good corporate governance is essential, namely: investors (existing and potential), directors, the investment manager and the administrator/company secretary.
In considering the corporate governance mechanisms in a little more detail, differentiation into three separate categories should be determined: 'why', 'by whom' and 'how' effective strategies may be put in place.
The purposes of a robust mechanism of corporate governance are to:
- reduce the potential for management abuse or fraudulent activity
- increase the confidence of prospective investors, particularly at the initial fund-raising stage; this can be a positive marketing element itself in attracting investors
- provide shareholders with a system whereby they can understand the ways in which risk can be quantified and managed
- assist with the elimination of potential breaches of ongoing legal and regulatory obligations
Primary responsibility for the implementation, monitoring and effectiveness of the company's corporate governance regime firmly lies with the board of directors. It should be ensured that the constitution of the board has an appropriate mix of expertise, experience and independence (of the sponsor/promoter and investment manager). While there are no hard and fast rules, recommendations are often given that at least a third of the board should be independent and nonexecutive, though many institutions go further than that to put in place a majority of such directors.
These independent non-executive directors become even more relevant and important if and when a company looks to establish any committees (in particular, the audit committee and remuneration committee). Each such committee should have clear terms of reference which specify their functions, responsibilities and authorities. Increasingly, the directors look to the company secretary/administrator in facilitating strong corporate governance on behalf of the company. The company secretary will assume much of the responsibility for measuring compliance with the ongoing legal and regulatory obligations, as well as ensuring that it manages the board and committee meetings, producing timely and accurate minutes from them.
The directors, often, as mentioned above, with the assistance of the company secretary, would look to establish and develop the corporate governance systems that enable them to ensure that the necessary structures and processes are in place and are effective.
In particular, they should:
- develop systems and processes that ensure the integrity of all financial information and the financial stability of the company
- develop risk management processes to eliminate any potential defects in the products or services that are provided by and for the company
- ensure that the company's constitution and regulatory regime is complied with
- ensure that the board meet regularly and receive sufficient information in order to make appropriate informed decisions
- ensure that timely communications with shareholders occur, such as annual and interim financial statements, within statutory deadlines, the publication of net asset values/prices and meaningful reporting from the investment manager
Board (or committee) meetings provide the directors with the opportunities to consider and, if deemed appropriate, challenge the information they are provided with. In the current climate, the reported net asset value will often be the focus of attention. In this regard, directors should be very keen to receive a report from the investment manager or adviser, detailing performance of the fund since the last meeting, what elements of the portfolio have performed well or poorly, what activity has taken place and what the views of the manager or adviser for the next period are.
While it would be best practice for a representative of the manager or adviser to be at the board or committee meeting, if the manager or adviser does not attend, they should be available by telephone for the relevant part of the meeting to allow them to respond to questions raised by the directors. Should the net asset value incorporate investments that are valued with anything other than prices obtained independently from third parties, then the directors would need to consider these separately to determine the suitability of their use and to be able to compare such historic values, if possible, with the final independently derived values, once those have been received.
Although the primary responsibility for a good system of corporate governance rests with the directors, the above brief outline of the mechanisms involved to help achieve this should highlight the extent to which the independent administrator, in its role as company secretary and producing valuations and financial statements, has a major part to play.
Legis Fund Services prides itself on having an excellent reputation, especially among independent non-executive directors, for taking this particular aspect of its role as an offshore service provider extremely seriously. Legis believes that the directors should be able to rely upon the company secretary to perform a co-ordinating role for this function, and thus employs a team within the corporate secretarial area of the business, who have proven experience in dealing with such aspects. Legis Fund Services is also a Category 2 Listing Member of the Channel Islands Stock Exchange, and so also ensures that the continuing obligations associated with a listing on the Exchange, as well as for listings on other exchanges, are met.
For more information about Guernsey's finance industry please visit www.guernseyfinance.com.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.