New corporate governance funds code enhances Ireland’s reputation
The new corporate governance code will enhance Ireland’s reputation as a funds domicile and catapults Ireland ahead of other funds centres says KEVIN MOLONY.
The Irish funds industry displayed remarkable resilience in the aftermath of the financial crisis in 2008 and during the recent market turmoil. In fact, the growth of the industry has been relatively stable when compared to the overall financial services sector and Ireland has established a leading position in the global funds industry through its many competitive advantages. A key component of our relative competitiveness is our adoption of best practices in fund governance - ahead of many competing jurisdictions - and the quality and professionalism of most Irish fund directors. This has provided a great advantage to Ireland as a funds domicile in the wake of the financial crisis, as many investors around the world are demanding greater protection and transparency.
Kevin Molony
Kevin Molony

The Irish Funds Industry Association (IFIA) recently published a governance code which outlines the minimum recommended requirements that a collective investment scheme should meet to promote effective governance.
This code is the most comprehensive and prescriptive governance code introduced by any funds domicile. Whilst Luxembourg, the other major European fund domicile, does have a code of conduct for investment funds the new Irish code has far greater depth and breadth in its provisions.

The code was developed in consultation with the various industry service providers and the Central Bank and it became effective on 1st January 2012, with a 12 month implementation period. Rather than introducing a completely new corporate governance regime, many of the code's requirements reflect current practices in the industry.

It outlines many existing statutory and regulatory duties of the director as well as introducing some new provisions related to the composition and operation of boards of directors. It recognises that the fund’s board is the focal point of governance and that their primary responsibility is to protect the interests of the underlying investor.

This code, like many other governance codes, is considered ‘soft law’ and as such provides guidelines and best practices for fund boards. It will operate on a ‘comply or explain’ basis with any explanation of non-compliance required in the annual director’s report. Whilst most fund boards will fully adopt this code, as it largely reflects current practices, some will require an element of change. The biggest challenge is going to be compliance with the board composition and independence provisions and this will result in significant rotation of board members during the transitional period.

Whilst this code will initially operate on a voluntary basis, its level of adoption will be monitored closely by the Central Bank. This will dictate whether it will become more prescriptive in the future.

The code doesn't specify a maximum number of directorships an individual can hold, but it justifiably requires the director to devote sufficient time to each appointment to fulfil their duties and responsibilities. The board must document the time commitment expected of each director in a letter of appointment. This will complement the enhanced fitness and probity regime which was introduced recently by the Central Bank and will facilitate the on-going monitoring of directors' time.

The practical implications of this are that a few directors with substantial portfolios will need to resign some of their positions. This will depend on the nature, scale and complexity of their existing directorships, whether the director is a full time director and the extent of their other commitments.

The code requires a fund board to have a minimum of three directors with at least one independent director. Its recommendation for at least one director from the promoter or investment manager has been very well received as it will promote an alignment of interests and the availability and flow of information to the board. It also retains the need for a minimum of two Irish resident directors to ensure that there are directors reasonably available to meet the Central Bank at short notice. These provisions present a serious challenge for the industry as there is a limited pool of Irish professional fund directors with sufficient capacity and accessibility.

The code states that the board will be responsible for appointing all directors. In reality, the fund promoter will normally select directors from a list of candidates recommended by their legal advisors. This differs to large corporate boards where directors are appointed by the board on the recommendation of the nominations committee.

The selection process is much less rigorous and the selection criteria are normally decided by the fund promoter. The fund promoter typically decides on the director’s remuneration and their selection on related or connected boards. The promoter’s power is also reinforced by their ability to replace existing directors. The challenge for the director is taking a pragmatic approach to the promoter's business interests whilst always retaining their independence of character, judgement and mind.

The highest standards of governance are achieved where the promoter values the independent perspective and the contribution of the non-executive fund director and this is reflected in the director selection process.
The code also addresses best practices for the operation of board meetings, the role of the chairman and procedures for establishing committees of the board. It recommends an informal annual review of board performance to include director's attendance at meetings as well as a formal review of board membership every three years. It also recommends documenting a 'conflicts of interest' policy which many existing boards would already have in place. It is commendable that the code aspires to the highest governance standards by including many provisions which would typically feature in long established codes like the UK Corporate Governance Code.
The 12 month transitional period for implementation will facilitate boards undertaking a 'gap analysis' of their practices relative to the provisions of the code.

Given the heightened focus on proper governance on the part of promoters, regulators and the underlying investor, I believe this code will be fully adopted by the vast majority of Irish fund boards. This will facilitate the on-going differentiation of Ireland from a fund governance perspective and enhance our reputation as a leading international funds domicile.
Kevin Molony is managing director of Walkers Corporate Services (Dublin) Limited.
This article appeared in the February 2012 edition.