Good corporate governance is an essential element of any successful fund. Cayman Funds spoke to Greg Robbins of Mesirow Advanced Strategies about the best approaches.
What are the challenges companies typically face when trying to ensure good corporate governance in Cayman?
There is nothing particular to Cayman or any other jurisdiction that presents challenges to establishing good corporate governance. Instead, in our view, the challenges to good corporate governance arise largely because some fund managers and their service providers prefer weak corporate governance, because they believe it favours the fund manager.
For example, our experience is that some US -based law firms advise managers to use weak directors because those directors are less likely to challenge the manager. That may make sense for those law firms, whose fiduciary duty is to the manager, but it doesn’t make sense for the investors in those managers’ funds.
What are the best strategies to ensure that investors can be confident in your governance structures?
Because the really difficult issues that directors may face can vary so widely, we believe a manager should hire directors who are known for (or can demonstrate) that they are inquisitive, involved, and take seriously their responsibilities and fiduciary duties to investors. Managers should encourage their investors to speak with the fund’s directors to confirm that the directors know the manager and the manager’s funds.
Managers should not ask nor permit the directors to delegate their responsibilities to the manager. Managers should make sure their offering and marketing documents state clearly that the manager expects the directors to be actively involved and to act in the best interest of the shareholders.
At what point in the set-up of an investment vehicle do you need to address governance?
Well before the manager has determined what the terms will be and, in particular, the terms relating to difficult issues such as side pockets. We constantly hear managers justifying the terms in their documents by saying that the terms are there because the manager’s lawyers told the manager that the terms were market—even when those terms are unfair to shareholders. That immediately causes us to lose faith in the manager and the directors of the fund.
If they are not exercising independent judgment about what is appropriate at the set-up of the fund—regardless of what a law firm may have done for its past few clients—then when will the manager and, even more importantly, the directors exercise independent judgment? So a strong governance structure needs to be in place when the fund’s terms are being set, and before offering documents have been finalised.
How do you go about it? Who takes responsibility?
At the set-up stage, the manager is often rushing to launch a fund as quickly as possible. In our experience, the manager usually has its other service providers in place before the directors, and then one of those service providers (law firm, auditor, prime broker) will recommend the other service providers, including the directors.
This may put the director in an uncomfortable position because the director may be reviewing the work of the law firm that referred him or her to the manager. Even so, the director must take responsibility for setting expectations with the manager that the director will need some time to review documents and may very well need to ask questions of the manager regarding whether the manager has considered whether one or more terms are appropriate for shareholders in light of the manager’s intended strategy and basic fairness principles.
“If a manager does something we do not expect that we regard as unfair, we count on being able to appeal to the directors to intervene on our behalf.”
No-one else can be counted on to take that responsibility because none of the other fund service providers has a clear fiduciary duty to shareholders regarding fund terms. We will know that our industry has taken corporate governance seriously when draft fund terms are being re-written because experienced and respected directors have advised managers that unfair or poorly thought-out terms ultimately are not good for the shareholders, the manager, or the industry.
What kind of balance are you looking for in terms of oversight and governance? What kinds of professionals need to be involved?
We employ a large number of professionals with very diverse backgrounds to select and monitor the managers we invest with. Therefore, we are less interested in oversight, although we have found that managers who aggressively use their directors as a preliminary oversight mechanism and sounding board sometimes save themselves embarrassment.
At Mesirow, our primary concern is governance and fairness. If a manager does something we do not expect and that we regard as unfair, we count on being able to appeal to the directors to intervene on our behalf. As long as a director is sophisticated enough to understand both sides of the issue—the manager’s and the shareholders’—and make a reasoned determination that advocates for shareholders’ interests, that is far more important to us than any professional qualification.
Can you talk us through your own experiences, and highlight any widely applicable lessons you can draw?
Unfortunately, our experience is that directors continue to take very different views of their obligations towards shareholders, and how those obligations should be discharged. There are directors who sit on many, many fund boards who, in our view, simply fail to act in any meaningful way on behalf of shareholders. In contrast, there are fantastic directors who can be counted on to be active, engaged, and thoughtful, although by virtue of their taking their jobs seriously they are inherently capacity constrained.
Because of the widely varying approaches, investors need to take a ‘buyer beware’ approach to the directors of any fund they are considering investing in, if the fund terms and the strategy dictate that a strong corporate governance structure be in place. In that scenario, if an investor doesn’t know the directors, the investor needs to undertake the due diligence necessary to understand whether the directors will advocate for shareholders and then proceed accordingly.
We can say that Carne is one of those services firms that we are typically happy to see sitting on the boards of funds we invest with. Carne has taken a strong leadership role in working with institutional investors to develop due diligence methods that provide meaningful guidance about a director’s views and past approaches to difficult governance issues. The directors at Carne have also, in our experience, been willing to take an active and engaged approach with the managers of the funds on which they serve.
Greg Robbins is a senior managing director, general counsel and chief operating officer for Mesirow Advanced Strategies, Inc. He can be contacted at: firstname.lastname@example.org
Greg Robbins is a member of the executive and operating committees and responsible for the legal affairs of Mesirow Advanced Strategies, Inc, including providing legal advice with respect to all aspects of its business. Prior to joining Mesirow in 2008, he was a partner in the investment funds, advisers and derivatives group at Sidley Austin LLP, where he specialised in providing legal advice to hedge fund managers and participants in the derivatives industry.