Welcome to the first in our series of bulletins on fund governance and the role of fund boards. Over the next few months we will be posting about fund governance and the role played by independent fund directors on the boards of funds.
For alternative asset managers, the pressure to provide better governance has never been more intense. Governance has crept into operational due diligence processes – prospective investors are spending more time and energy scrutinising fund boards and directors. The Madoff fraud and the Weavering case have both been important watersheds in the ongoing development of better governance procedures for fund boards.
How to improve your governance provisions
What do we mean by good governance, and how can fund managers go about ensuring they are ticking all the right boxes? Governance best practice is more than simply achieving the minimum standards expected by regulators – the standards expected by investors are higher.
Good governance means ensuring that a fund board is properly independent. Many fund boards will typically have three directors – ideally, two of these should be independent appointments. The directors on a fund board are responsible for ensuring good governance, and their responsibilities should extend to supervising the management of the funds and reporting to investors.
Directors are subject to laws and regulations as laid down by the jurisdiction of the fund – while they may not necessarily be resident in the same jurisdiction as a fund is domiciled, they should still be aware of their ongoing responsibilities as directors.
Independent fund directors should ideally not be sitting on the board of the investment management entity which advises the fund. However, they still carry significant responsibilities pertaining to the investors in a fund. A truly independent director will be someone without links to either the investment advisor or indeed to his/her service providers. Investors are becoming ever more diligent in scrutinizing such links, for example, familial relationships.
Independent directors should also, ideally, be professionals with a substantial track record in the investment industry. Managers and their advisers should be looking for candidates with a minimum of 10-15 years’ experience in this sector. Typical candidates will be former employees of fund law firms, fund administrators or fund auditors. More recently, there has been more emphasis on candidates with legal or risk management experience.
Funds should also be able to demonstrate that they have a written governance policy, which covers not only governance procedures, but also how conflicts of interest are managed.
Fund governance – a short check list for managers
• Fund boards should be independent – i.e. a majority of independent directors.
• Directors should be experienced – a minimum of 10-15 years of experience in the investment industry.
• Directors should be aware of and compliant with the regulations within the home jurisdiction of the fund.
• Directors should first and foremost represent the interests of investors in a fund.
• A fund – and ideally the investment advisor – should maintain and regularly update their governance and conflicts of interest policies.
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