Comment: Board behaviour - corporate governance for investment funds
Madeleine Cordes, vice-president at Walkers Corporate Services in the Cayman Islands, outlines the steps Cayman funds should be taking to ensure effective corporate governance and to get the most out of board meetings.
More than ever in the current climate, hedge funds are required to maintain effective corporate governance policies and procedures. Whether this is in order to satisfy investor or regulatory concerns, it has become essential to demonstrate that corporate governance is not just an exercise in ticking boxes.
We have heard much recently of the term 'behavioural governance', but all this really means is acting properly because it is the right thing to do and not simply to meet the requirements of a particular code or framework.
Where independent directors are in place on a board, it goes without saying that the full board should be involved in major decisions. Whether the meetings are held by telephone or in person, a record should be kept of the matters discussed and board resolutions prepared to document the decisions taken. The alternative would mean that decisions are made informally, with no records kept and without necessarily getting the right contribution from the right people.
Amid the current market volatility, best practice would see boards meeting three or four times per year. This would allow for current market updates from the investment manager and an effective strategic decision making process. Additionally, ad hoc discussions between board members should take place in between the regularly scheduled dates in order to address one-off matters such as the appointment of a new director or service provider or deal with other urgent issues.
Conference calls may be easy to set up, but it is also advisable to have face-to-face meetings where practicable, where directors can speak directly to the investment manager or other invited service providers to the fund. For a Cayman Islands fund there is no requirement to hold annual general meetings, or for such meetings to take place in Cayman.
However it may be helpful to bring all participants to the home domicile at least once per year, which helps demonstrate that control of the fund does not rest only with the investment manager, typically located in the US or Europe. When board meetings are planned in different jurisdictions, taxation issues should also be considered.
Attendees need to have all the relevant information in front of them at the meeting. Comprehensive board papers must be sent out in good time, so that they can be read in advance, without overwhelming participants with information. The current trend is for board packs to be emailed rather than couriered, with a couple of hard copy packs available at the meeting itself. Walkers Corporate Services is developing a web portal where board papers can be accessed and downloaded by participants, with historical papers stored for future reference.
During the meeting itself, the investment manger will usually provide a verbal update on the current state of the market and the fund(s), with the most recent historical written report included with the board papers. Directors need this information to guide their decision making on any matters related to the fund's investment policies and strategies.
Compliance reports should be included from all providers and these should contain any breaches of the investment policy, anti-money laundering issues or any complaints from investors. Service providers should be encouraged to give detailed verbal reports and the minutes from any independent pricing committees should also be reviewed.
Meetings also provide an opportunity to bring the rest of the board up to speed with any routine contracts that have been entered into between meetings under delegated authority, for example with service providers or trading and brokerage agreements.
Any pricing by the investment manager or other non-independent pricing should be reviewed or ratified too. While the most recent set of financials will certainly be reviewed, an audit committee or separate meeting will be better placed to deal with any detailed accounting queries, rather than wasting time in the actual board meeting.
Quite rightly, investors want to see fund directors getting involved and providing effective oversight of the investment manager. The drive by funds to secure good quality directors has been one benefit coming out of the financial crisis. The ideal board composition will very much depend upon the size of the fund,
In line with Aima recommendations, having a majority of independent offshore directors can be seen as a typical example of best practice, although even a minority of independent directors still offers some independent oversight and additional value.
It is, of course, important to keep the fund's performance in mind when making corporate governance decisions, such as the cost of independent directors. In addition to striking the right balance of governance, funds need to ensure that they are getting directors that meet the operational needs of the fund with fees that match.
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