Background
Hazel Marshal (HM) was the judge in the Carlyle case in which important issues were raised and resolved relating to directorial responsibilities and duties. The purpose of the Roundtable was to discuss these between her and a number of fund NEDs (VH, TM and MdH), and DS (for IMs), and DW and JB of Thorndon.
Meeting was under the Chatham House rule so no specific attribution will be made in regard to any specific comments arising out of the meeting. However, HMs judgement is in the public domain.
- Is there a different regulatory duty?
- What is its nature?
- Taken together, what is legal and practical effect of the Guernsey law found in Carlyle, and the regulatory regime, on the funds industry non-executive Directors?
Common law vs regulation
Much of the findings arose out of a misalignment of common law duties of directors and those prescribed under regulation. To this extent it was felt important that the findings of the judgement should be read into the regulations to avoid inconsistency save where bit is necessary and expressly intended. It was noted that there was no reason why regulation should not go beyond common law but that they should not conflict with each other.
Collective vs individual responsibility
It was expressed that “collective responsibility” should better be termed “collective result” or collective purpose” given that the responsibility of directors is individual under common law.
It is also worth noting that company law talks of directors collectively and makes no distinction between executive directors and non-executive directors in terms of responsibilities, only the collective responsibilities of the directors as a board.
It is self-evident that each director will have his or her own capabilities and expertise. None of them can reasonably be expected to have complete knowledge and expertise in all aspects of a company’s activities. However, the courts should and do have varying expectations of each director’s insight and understanding depending upon their degree of day-to-day involvement and professional background. Hence a NED might not be expected to have the level of understanding of an ED.
It was also noted that whilst directors are expected to interrogate and sense check information provided to them, they may assume it to be provided in good faith and to be true.
Strict liability
It was noted that under AML regulations there is strict liability of directors. This is a problem because the poor drafting of AML and other regulations never include liability standards and penalties/sanctions. Therefore, the judge or the regulator has to resort to ordinary law about directors and NEDs in particular [Carlyle case].
Governance vs compliance
Compliance is a duty to take reasonable steps to achieve and exercise appropriate skill and diligence. This is only part of governance but the GFSC promotes and encourages “compliance minutes” as if compliance with regulation is the most important function of the board. Many practitioners (and some directors!) are complicit in this.
It is likely that at times when all is well such minutes will be watertight in respect of routine compliance matters. However, when boards are meeting and acting in stressed circumstances, acting under pressure, and responding to fast-moving, difficult events, it is likely that paperwork will be less perfect. That cannot and should not be taken as proof of inadequate governance or improper process.
Furthermore, all records and actions must be looked at in the circumstances at the time when judging the actions of directors. Perfect hindsight was not available to them and perfect foresight is not available to any of us. The critical issue is whether the directors acted reasonably and appropriately in the circumstances that they and the company faced at the time, including the information available to them.
Independence of directors
This needs clarification and is perceived differently from different perspectives. Such as:
- NEDs themselves argue that it is independence of mind
- Regulators want to prescribe maximum tenure, conflict procedures etc
- Investors want demonstrable independence of directors from the executive and each other
This should not be a matter for regulatory prescription and the way in which independence should be regarded/measured must vary depending on circumstances. No one set of standards can properly reflect the variety of circumstances (i.e. family company vs listed, listed fund vs family office PIF, independent vs subsidiary, etc). At present it is an unfortunate fact tat the GFSC places great store by its perception of independence based on its own prescriptive guidance.
Clear responsibility of appointed directors to respect their duty to the company ahead of any responsibility they may feel to their appointor. This is important where IMs or Administrators nominate directors.
Furthermore other attributes are required and often undervalued – directors need to be informed, intelligent, diligent, and of enquiring mind. Knowing what questions to ask and able to understand and digest the answers is as important as independence. There is little value in independence in the absence of the others.
DW note: interesting that whilst the GFSC are heavy handed on independence and want to be more so requiring that particular criteria be met in prof of independence, they are comparatively lax on “fit and proper” where you are deemed so unless proved otherwise.
Governance of the Commission
There are clear issues with a situation where the drafter of regulations is also the interpreter and enforcer. Given the clear concentration of power this confers and the lack of realistic, objective appeal options.
DW note: this is clearly lacking in reasonable accountability, further exacerbated by the lack of good governance at the GFSC, the poor quality of the Commissioners themselves, and the consistent lack of understanding of the business they oversee. It is hard to think of another institution where so much power is vested in one individual and where that individual is effectively accountable to no-one.
Suggested actions to be raised with GIFA
It was suggested that an analysis of all financial regulations against the findings in the Carlyle judgement regarding directors’ duties be undertaken. The findings of this should be addressed with the GFSC and company law to make the two consistent.
Given the importance placed on independence by the regulator, current prescriptive criteria and guidance combined with increasingly prescribed rules regarding board make-up, could mitigate against achieving the best governance outcome. It would be better to have more informed and flexible guidance. Whilst some independence of mind within the governance process is very important, the independence of each and every director is not. A more intelligent way might be for the board to have in place a statement of policy as to how independent thinking is included within the governance process, based on the needs of the company and its stakeholders rather than assuming that only the presence of independent NEDs can achieve this.
The imposition of personal (and in some cases strict) liability on individual directors is incompatible with company law. Directors are collectively responsible for activities and outcomes. Individual responsibility can only arise in the case of personal actions, not collective ones.
There is certainly appetite on the part of NEDs and willingness on the part of HM for a larger event covering the same material.
