Corporate governance is major investor concern, Carne Group survey reveals

InvestorsOperational Risk
28 Sep, 2011

A survey by consultancy firm Carne Group has revealed that 91% of investors would shun a fund if it had substandard directors on its board giving corporate governance reform a renewed urgency.

The survey, which polled 100 allocators with $600 billion in assets, said 76% of respondents had already decided against investing in a fund at least once due to governance concerns. “We are seeing a growing awareness about the importance of good governance,” highlighted Kevin Ryan of Hedgedirector, a provider of independent directors to hedge funds.

This comes following a Cayman Islands’ court decision to fine two directors $111 million each for “default of duties” during their tenure on the board of the now defunct Weavering Capital. Aymeric Lechartier, managing director of Carne Group in London, acknowledged the survey was conducted prior to the Weavering judgement indicating some investors might express even more concern about corporate governance now.

The overwhelming majority of investors also said existing governance standards needed improvements, particularly in Cayman. Cayman has faced increased scrutiny over the quality of its corporate governance. There have been criticisms about lacking transparency with more than 80% of investors claiming they had difficulty identifying the number of boards directors sat on.

Several high profile pension funds and the fund of hedge funds Mesirow Advanced Strategies have also called for the Cayman Islands Monetary Authority (CIMA) to create a publicly available, online database of hedge fund directors identifying which boards they sit on. CIMA said it is reviewing this request.

“We are being asked more and more by investors about how many boards our directors sit on. We are more than willing to oblige to this although some directors don’t. This suggests those directors might be sitting on a significant number of boards,” said Lechartier. Some 58% of respondents believed directors should not have more than 20 to 30 manager relationships.

A significant chunk of those polled wanted directors to have greater independence and expertise. Many directors are often sourced from law firms, administrators or custodians. “It is essential that directors come from different backgrounds and that the board is balanced,” highlighted Lechartier.

However, there have been criticisms that many directors lack investment management experience. “There are very few directors who have specific expertise as portfolio managers within the hedge fund industry. It is an important skill to have as it is an excellent check on the fund manager,” said Ryan.

COO Connect will be conducting a survey later this year of prime brokers and hedge fund administrators on how they help their hedge fund clients in their capital raising efforts, whereby corporate governance will be a major focus.