The theory is that shareholders as owners of the business determine who manages a business for them. The reality often is that boards choose the people who serve, influenced by the choices of a handful of directors or a dominant shareholder interest.
As I have written before governance on investment fund vehicles is largely influenced by the investment manager that sets up the fund. Of course a large shareholder can influence choices on the board but it is rare for investors to get involved other than perhaps to avoid investing if they are uncomfortable about the composition of a board or to insist on the existence of at least one independent director – although that ‘independent’ director is generally still anointed by the investment manager.
So it was with interest that I had my attention drawn to s.971 of the Dodds Frank Wall Street Financial and Consumer Reform Act under subtitle G – Strengthening Corporate Governance. (Thank you James!)
This section amends section 14(a) of the Securities Exchange Act of 1934 to give the SEC power to prescribe rules and regulations to require that a solicitation of proxy, consent, or authorisation by or on behalf of an issuer include a nominee submitted by a shareholder to serve on the board of directors of the issuer. This will be done under such terms and conditions as the SEC determines are in the interests of shareholders and for the protection of investors. The SEC can exempt an issuer or class of issuers from the requirements taking into account whether it disproportionately burdens small issuers.
Why is this section of interest? Simply because it serves to indicate that there is increasing recognition that investors interests may need protecting and this could be a small step in adjusting the balance of power that exists on company boards.
Investors in funds need to be adopting a similar approach by nominating to boards those with the knowledge and willingness to give primacy to their interests. The lessons of 2008 clearly indicate that due diligence on its own is insufficient. Involvement in governance on an ongoing basis is necessary to ensure that the investment fund tracks the course that investors should expect of it. That will only be possible when investors begin to require their nominees to be represented on boards of vehicles they invest in.
Section 954 on clawbacks in the same Act is for another day – however in the meantime investors should be considering providing their own co-pilots to make decisions in the cockpit.
©Jaitly LLP