By Shay Lydon (pictured) and Phil Lovegrove – The financial crisis has precipitated a series of corporate governance reforms at both EU and national level. In April 2011, the European Commission published its Green Paper on Corporate Governance, and further corporate governance proposals relating to limits on number of mandates, risk committees, board diversity and remuneration were included in July 2011 proposals to amend the Capital Requirements Directive (2006/48/EC and 2006/49/EC), the so-called CRD IV legislation.
In keeping with these developments, the Central Bank of Ireland indicated that the development of corporate governance codes for the financial services sector was a priority. However, the Central Bank has recognised the need for a proportionate application of corporate governance standards and not a ‘one size fits all’ approach for different financial services sectors.
Consequently, the Central Bank invited industry representatives, through the Irish Funds Industry Association, to draft an appropriate corporate governance code for Irish funds. Matheson Ormsby Prentice was represented on the steering group established by the IFIA, and the finalised corporate governance code for the Irish fund industry was published on December 14, 2011.
The code, which became effective on January 1 with a transitional period of 12 months, will apply to Irish-authorised investment funds and management companies. It operates on a ‘comply or explain’ basis, so that where a board decides not to comply with any provision of the code, the reasons for non-compliance should be set out in its directors’ report or on its web site.
The code represents a codification of existing practice in Ireland combined with what is seen as best international practice. The vast majority of its requirements are therefore already being complied with by Irish-authorised funds, but boards of funds and management companies should review the code and consider whether to adopt it in full.
The importance of high standards in corporate governance was highlighted in the August 2011 judgement of the Grand Court of the Cayman Islands in Weavering Macro Fixed Income Fund Limited (In Liquidation) vs. Stefan Peterson and Hans Ekstrom. The judgement focuses on directors’ supervisory functions with respect to delegation and the policies and good governance procedures that directors should adopt in order to meet their expected duties of skill, care and diligence.
Arising from the judgement, which could be persuasive were similar issues to arise before the Irish courts, directors should satisfy themselves, on a continuing basis, that the various professional service providers are performing their functions in accordance with the terms of their respective contracts and that all necessary managerial and/or administrative functions are being performed, including the maintenance of fair and accurate minutes of board meetings.
In the Weavering case, as a result of not following these principles, the defendant independent non-executive directors were held to have shown wilful neglect and default and were ordered to pay damages of USD111m plus costs.
The heightened focus on corporate governance at both EU and national levels, and decisions such as that in the Weavering case, underline the importance of directors of funds and management companies being fully aware of their duties as board members.
The code will provide directors of Irish funds with useful codification of best practice and assist them in taking such practical steps as may be necessary to discharge those duties with appropriate skill, care and diligence.
Shay Lydon is a partner and Phil Lovegrove an associate in the asset management and investment funds group at Matheson Ormsby Prentice
