CORPORATE GOVERNANCE: A NON-EXECUTIVE DIRECTOR S PERSPECTIVE

Transcription

1 CORPORATE GOVERNANCE: A NON-EXECUTIVE DIRECTOR S PERSPECTIVE Antony R Gardner-Hillman Regulated by the Jersey Financial Services Commission in the carrying on of trust company business. Tel: tony@gardner-hillman.je Presentation to The Jersey Funds Association Tuesday, 20 April pm pm 1

2 CORPORATE GOVERNANCE: A NON-EXECUTIVE DIRECTOR S PERSEPECTIVE Tony Gardner-Hillman graduated from Balliol College, Oxford University (First Class Honours, Jurisprudence, B.A. (Honours) 1979, M.A. 1987) and qualified as an English solicitor in London in He moved to Jersey in 1984 to join the Jersey law firm Crills, where he was a partner from 1987 to May 2002 and headed the firm s Financial Services Business and Regulation group. As a practising lawyer Tony specialised in investment funds, financing structures (including asset securitisation), banking, and corporate and financial restructuring. His work covered corporate governance advice as well as regulatory, dispute and other corporate and commercial aspects. In 1987 Tony co-founded Jersey Trust Company. In February 2008 he disposed of his remaining shareholding and resigned as non-executive group chairman. Since 1994 Tony has regularly spoken at conferences and written articles for publication on subjects including corporate governance, regulation, directors duties and third party fund administration. Tony now works full-time as an independent non-executive director, primarily in the investment funds industries. 20 April,

3 CONTENTS WHY DOES THE NED NEED TO CONSIDER CORPORATE GOVERNANCE? CORPORATE GOVERNANCE OBLIGATIONS AS THEY AFFECT THE NED THE NED s EXPECTATIONS OF THE COMPANY SECRETARY THE NED s EXPECTATIONS OF ADMINISTRATION THE NED s EXPECTATIONS OF COMPLIANCE THE NED s EXPECTATIONS OF THE LAWYERS THE NED s EXPECTATIONS OF THE AUDITORS THE NED s EXPECTATIONS OF THE REGULATOR THE NED s EXPECTATIONS OF HIS FELLOW DIRECTORS INDEPENDENCE ON MANAGEMENT BODIES OPPORTUNITIES FOR THE NED 3

4 WHY DOES THE NED NEED TO CONSIDER CORPORATE GOVERNANCE? 1. Where did it all begin? Review of 1990s scandals: 1990 Polly Peck International 1991 Maxwell Communication Corporation / Mirror Group Newspapers 2000 Equitable Life 2001 ENRON Corporation 4

5 2. What is corporate governance? Definition: Corporate governance is the system by which an organisation is directed and controlled. A corporate governance framework specifies the distribution of rights and responsibilities among different participants in the organisation and sets out the rules and procedures for making decisions. Risk management is an integral part of the corporate governance framework. [JFSC Codes of Practice for Funds Services Business, 4 July 2008 revision] OR Definition: Corporate governance is a modus operandi intended to ensure stakeholders expectations are met. [Tony Gardner-Hillman] 5

6 Company secretary Auditors Administrator Board of directors Lawyers Compliance Ultimate responsibility is with the board at the hub The board has to rely on input from those on the spokes Consequently, clear terms of engagement with each spoke are essential 6

7 3. Who sets the standards? a. Legislation i. Companies (Jersey) Law 1991 Article 74 (i) honesty and good faith, (ii) care, diligence and skill Articles 102 / 106 ii. Companies Act 2006 of Great Britain iii. Public Company Accounting Reform and Investor Protection Act of 2002 (Sarbanes-Oxley Act of 2002) b. Regulators JFSC Codes of Practice i. for Fund Services Business ii. for Trust Company Business iii. for Insurance Business iv. for General Insurance Mediation Business v. for Investment Business vi. for Deposit-taking Business vii. for Money Services Business c. Securities exchanges i. AIM ii. CISX d. Trade associations i. The Association of Investment Companies Corporate Governance Guide for Investment Companies ii. Quoted Companies Alliance Corporate Governance Guidelines for AIM Companies, 2 nd Edition 2007 e. Professional bodies i. The Institute of Directors ii. Securities and Investments Institute f. Supra-national bodies i. OECD Principles of Corporate Governance 7

8 3. Who sets the standards? b. Regulators JFSC Codes of Practice ii. for Trust Company Business span of control - each controller to exercise judgment independently of the others - individual responsibilities to be clear - monitoring from board and senior management levels to be adequate documented procedures for the management of risk The registered person acting as, or providing a person to act as, a director must: ensure the director is suitable, competent and understands his duties under the relevant laws, be able to demonstrate that reasonable care has been taken to understand the activities of the company have adequate procedures to ensure that, where appropriate, relevant documentation is subject to legal review. The Commission must treat seriously any failures on the part of directors to understand and discharge their obligations, given the Commission s statutory responsibility to protect the reputation of the Island and investors interests. The Commission can therefore be expected, as part of the normal on-site examinations programme, to review the conduct of directors in respect of their duties and responsibilities. (Market Turbulence Dear CEO letter, 26 September 2007). 8

9 CORPORATE GOVERNANCE OBLIGATIONS AS THEY AFFECT THE NED 4. What are the rules? Review of the Decade of Revolution the turn of the millenium: Cadbury Committee chaired by Adrian Cadbury and produced the first Code of Best Practice on Corporate Governance (1992). Its stated objective was 'to help raise the standards of corporate governance and the level of confidence in financial reporting and auditing by setting out clearly what it sees as the respective responsibilities of those involved and what it believes is expected of them.' Greenbury Report on Directors Remuneration (1995) Hampel Committee on Corporate Governance (1998) (produced The Combined Code) The Combined Code (July 2003) Higgs Review Role and Effectiveness of Non-executive Directors (2003) Turnbull Report (Financial Reporting Council) (Revised October 2005) 9

10 5. To whom do the rules apply? a. Legislation b. Regulators c. Securities exchanges d. Trade associations e. Supra-national bodies 6. How frequently will they change? 7. How does this affect the NED and you? 10

11 THE NED s EXPECTATIONS OF THE COMPANY SECRETARY 8. Convening of management body meetings (main board, audit committee, nomination committee, remuneration committee, investment committee, compliance committee, litigation committee) Frequency As required by the demands of the business, but not less than quarterly for main board. a. Agendas Standing agenda with additions as required, and with all known business to be outlined, Who controls the agenda composition? a. Conduct of meetings Role of chairman. a. Minutes Circulate draft while memories are fresh, Detail deliberations and reasons for decisions. e. Action points Include in the minutes a list of action points - apportion responsibility for follow up. f. Reporting back Via chairman or appropriate board committee. f. Follow up Do not leave action points unattended. Chairman to chase up. f. Concluding Record how action point was concluded. 9. AGMs 11

12 THE NED s EXPECTATIONS OF ADMINISTRATION 10. ADMINSTRATION includes a) Record keeping b) Back up for the directors individually provision of research, information and documents on request c) Information packs for board meetings d) Book-keeping e) Administration of loans, distributions and other monetary transactions f) Handling all payments g) Liaising with valuers and auditors h) Co-ordinating NAV calculations, preparation of management accounts and financial statements i) Administration of PI and D&O liability policies j) Outsourcing (eg website maintenance) k) Nomad / Stock Exchange liaison (announcements etc) 12

13 THE NED s EXPECTATIONS OF COMPLIANCE 11. COMPLIANCE includes Monitoring each of the following to ensure compliance: a) Investment transactions against restrictions in the offer document b) Memorandum and articles of association c) Control of Borrowing consent d) Functionaries permits e) Regulatory statute authorisations i. Trust company business ii. Investment management business iii. Fund services business iv. Insurance business v. Banking business f) Non-Jersey regulatory statute authorisations (eg affecting underlying businesses or assets) g) Anti-money laundering handbook h) Service level agreements and any other agreed terms of business (for a Fund, this will include the material contracts listed in the offer document) 13

14 THE NED s EXPECTATIONS OF THE LAWYERS 12. Preparation of robust constitutional documents (memorandum and articles, class rules, terms of reference for board committees), directors letters of appointment, terms of engagement for all service providers 13. Accessibility 14. Clarity of advice 15. Document production 16. Document review and analysis 17. Knowledge of regulatory requirements 18. Guidance on Stock Exchange rules 19. Transaction management 20. Working to deadlines 14

15 THE NED s EXPECTATIONS OF THE AUDITORS 21. Clear understanding of the business / assets 22. Clear understanding of valuation principles 23. Common sense and pragmatic interpretation of accounting standards and principles 24. Good input from overseas offices to a common standard 25. Realistic terms of engagement (including the approach to liability limitation) 26. Accessibility 27. Clarity of advice 28. Knowledge of regulatory requirements 29. Working to deadlines. 15

16 THE NED s EXPECTATIONS OF THE REGULATOR 30. Accessibility 31. Clear understanding of the business / assets 32. Clear understanding of the structure 33. Common sense application of the regulatory requirements 34. Working to deadlines. 16

17 THE NED s EXPECTATIONS OF HIS FELLOW DIRECTORS 35. Openness 36. Regular communication 37. Commitment to the need to work as a collective body 38. Absence of a dominant influence 39. Accessibility 40. Working to deadlines 41. Attention to detail. 17

18 INDEPENDENCE ON MANAGEMENT BODIES 42. On an investment fund board, consider the needs for: the investment manager s perspective, and access at board level to the investment manager for questioning, and the ability to make decisions independently of the investment manager s persuasion 43. Consider effects of the Corporate Governance 10 Years of Revolution and the new Best Practice 44. Consider composition and terms of reference of board committees 45. Consider listing and other regulatory requirements (see next slide) 18

19 45. (continuation) Consider: AIM Rules no best practice view on an independence requirement LSE Listing Rules, Rule 15 re Closed-Ended Investment Funds majority of the board must be independent NASDAQ / NYSE majority of the board must be independent Jersey Financial Services Commission This whole area is under review JFSC review includes the number of directorships held Fund Services Business Codes of Practice 3.1, especially requiring each director to exercise independent judgement without duress or undue influence from one another JFSC is questioning how directors differentiate between their roles as administrator and as director MLRO how responsible is he for information within the knowledge of the investment advisor? Jersey Listed Fund Guide, paragraph 1.5 majority of the board (including the chairman) must be independent Alternative is to rely on regulatory reach and just require minimum number of directors to be locally resident Jersey Expert Fund Guide, paragraphs 2.3, 2.4, 2.5,

20 OPPORTUNITIES FOR THE NED 46. How do we cope and ensure that a regard for corporate governance enhances rather than swamps our business? 20