The Irish regulator and its charges in the funds industry see corporate governance as a vital tool in attracting funds - by reassuring their investors.
The Irish funds industry knows that standards of corporate governance have become an important competitive differentiator for a domicile. Institutional investors now insist on independent boards of directors, and levels of transparency, which were unthinkable in the golden age of hedge fund investing before the financial crisis.
A survey by Dublin-headquartered governance specialists Carne Group found 71 per cent of allocators invested in both long-only and alternative investment fund managers believed governance has become a much more important issue over the last four years.
Investors are certainly acting when they encounter shortcomings. A Deutsche Bank Markets Prime Finance survey in 2013 of operational due diligence executives at institutional investors running $2.13 trillion in assets found a quarter had vetoed an investment because of governance concerns, and a third were devoting more resources to the issue.
The Irish regulators have noted the reaction of their Cayman counterparts to the Weavering case, in which the directors of a Cayman-domiciled macro fund that blew-up in 2009 were fined $111 million by a court on the islands that judged them negligent in failing to prevent the demise of the fund.
The Cayman Islands Monetary Authority (CIMA) has stipulated through its Directors Registration and Licensing Law that directors of Cayman domiciled funds must register with the regulator by the end of 2014. Directors of mutual funds are also subject to CIMA inspections and expected to adhere to the Statement of Guidance issued by CIMA in January 2014.
That guidance outlined the minimum standards expected of mutual fund board directors, including independence, the necessary skills and experience, engagement with service providers and disclosure of any conflicts of interest. There were also hopes of a publicly searchable database of Cayman fund directors, showing how many funds they served, but that idea stalled.
The CIMA website currently points out that directors are protected by confidentiality provisions under Cayman law. This stipulates that details on directors supplied to CIMA are protected from Freedom of Information requests, so nothing can be accessed beyond the name of a director, the type of registration and the licence the director holds, and the dates on which these were issued.
Given these limitations, it is not surprising that Ireland sees governance as a competitive differentiator. “Typically, the quality of governance in Cayman Islands can be mixed due to traditionally there not been any regulatory corporate governance standards - although it should be noted due to implementation of the new code this should change,” says John Skelly, a principal at Carne Group in Dublin. “While we have an office there, we impose limits on the number of boards our directors can sit on. My opinion is that corporate governance standards in Ireland are higher than in many offshore jurisdictions.”
The Central Bank of Ireland (CBI) has certainly worked to promote improved corporate governance standards. In 2012, it implemented a Corporate Governance Code for collective investment schemes and management companies domiciled in Ireland. The code identified minimum requirements as a test of effective corporate governance, including oversight that took account of the nature, scale, complexity of the business and any outsourcing arrangements.
The Code also stipulates that a board must have sufficient expertise and balance of skills to oversee its operation; that at least one director be an independent non-executive director; that at least two directors have Irish residency; and that at least two directors be reasonably available to meet the CBI at short notice.
The Code also demands full disclosure of any concurrent directorships, which puts Ireland at a distinct advantage over Cayman. “When a director in Ireland is asked about the number or type of fund boards they occupy, the director views it as a legitimate question and people will give an answer,” says Mike Kirby, founder of KB Associates, a boutique hedge fund consultancy in Dublin. “In Cayman, oftentimes, investors do not get a definitive answer.”
The 2012 code remains voluntary. However, the CBI has put in place a “comply or explain” regime. “The code looks to ensure boards are well run with meetings at least four times per year and careful scrutiny by directors of firms’ risk and compliance practices,” explains John Skelly. “It also looks to ensure directors are not sitting on too many boards. Anecdotally, the regulator is beginning to scrutinise the number of boards directors are sitting on.”
A fixed cap on the number of board seats would be unwelcome, even in Ireland. After all, a director sitting on the board of straightforward bond or equity fund would probably have an easier time than an individual overseeing a hedge fund transacting in bespoke swap transactions. The CBI has preferred to check directors are doing their jobs properly. They are, for example, required to complete detailed questionnaires outlining their commitments, to ensure they can devote enough time to their work.
To help ensure Ireland-domiciled funds attract directors of the right calibre, the CBI is looking at relaxing the requirement that funds appoint at least two directors that are resident in the country. It is doing so by defining Irish resident as an individual who spends at least 110 working days in the country during the course of the year. It has also clarified that it will be acceptable to replace one Irish resident director with an individual who has the necessary skills to serve on a board, and who can make themselves available to the CBI if required.
“The CBI simply wants to give fund managers flexibility when appointing directors,” says Mike Kirby. “They want directors with investment management expertise and a wider breadth of skills, which can complement the board. It is essential firms have a variety of individuals with different skill-sets. It is ill-advised to have a board composed on directors who share the same expertise.”
As it happens, the size of the fund servicing industry in Ireland means there is little risk of a shortage of qualified directors developing, says Pat Lardner, chief executive officer of the Irish Funds Industry Association (IFIA). “The CBI’s original code has helped ensure directors in Ireland are of a high standard,” he says. “There is a large pool of people here with the skill-sets to be directors.”
The 2012 governance code is now being updated. The CBI has circulated a paper proposing a reduction in the 15 designated risk oversight functions set out in the Alternative Investment Fund Managers Directive (AIFMD) to just six. The same shrinkage would also be applied by the CBI to UCITS management companies.