...the Central Bank conducted a thematic review last year in order to assess the number of directorships held by individuals on the boards of corporate investment funds, fund management companies and AIF management companies and the impact on fund governance.
The Central Bank has also engaged in dialogue with fund management companies on these matters. Following on from this, the Central Bank has now published guidance to assist boards and directors in assessing the time commitment of directors in fulfilling their roles (the “Guidance”).
The Guidance does not set a hard limit on the number of board appointments which a director may hold, however it is intended that high numbers of directorships combined with high aggregate levels of professional time commitments will be regarded as a risk indicator by the Central Bank. Additional supervisory attention will apply under the Central Bank’s risk-based approach to supervision where a risk indicator is triggered.
Setting of Risk Indicator
With this in mind, the Central Bank is calibrating that risk indicator with what its Guidance describes as “a joint test of (a) having more than 20 directorships and (b) having an aggregate professional time commitment in excess of 2000 hours” per year.
Comments made by Mr Gareth Murphy, Director of Markets Supervision, at the Irish Funds Annual Conference last Thursday 11 June 2015 suggest that the Central Bank will apply this as a two-staged assessment: where an individual director has an aggregate professional time commitment in excess of 2,000 hours per year, the Central Bank will then consider the number of directorships being held. Pursuant to the Central Bank’s risk-based approach, where this two pronged assessment indicates that fund governance standards on the relevant boards may be undermined, this will attract the appropriate Central Bank supervisory attention.
Application of Test – Proposed Directors
Where it is proposed to appoint a director to a board who has aggregate professional time commitments exceeding 2,000 hours and already holds more than 20 directorships, the Central Bank (a) will request a letter from the relevant board setting out the proposed time commitment for the director and (b) will not, where a qualifying investor AIF (“QIAIF”) proposes to appoint such a director, permit the QIAIF to avail of the usual 24 hour fast-track authorisation process (on the basis that, in each such case, the Central Bank will be considering additional enquiries which will not be capable of being completed within that timeframe).
Application of Test – Existing Boards
From 1 January 2016, previously authorised investment funds with individual directors triggering the risk indicator will receive priority consideration for inclusion in Central Bank thematic reviews where board effectiveness is being assessed.
Direct Engagement with Directors
The Central Bank also notes in its Guidance that it will directly engage with individuals holding high numbers of directorships combined with high aggregate levels of annual professional time commitments to ensure that their legal obligations and responsibilities as board members are being met, and that it will monitor directors’ commitments so as to avoid any potential risk that governance standards may be weakened.
Conflicts
The Guidance requires individuals with multiple directorships to consider the conflicts which may arise when sitting on a number of boards and the corporate interconnectivity that is created. Conflicts which may occur between individuals with full-time positions in a service provider to the board are also required to be considered.
Agreeing and Assessing Time Commitments
Directors and boards are required to agree a minimum time allocation for board meeting attendance; this should include all necessary preparation, review of documents and also, where appropriate, travel time. The agreed minimum time allocation should be documented in the director’s letter of appointment.
Sufficient time should be set aside as a buffer for directors to deal with ad hoc issues that arise from time to time. This should be in addition to the normal time allocated to each director role.
Individuals should consider the extra time required to deal with the number of underlying sub funds within one investment fund. The type and complexity of individual investment funds and sub-funds should also be considered carefully by individuals when assessing both the required time commitment and the necessary expertise needed at board level to oversee the investment fund.
Designated Persons
The Guidance specifies that a separate letter of appointment should issue in respect of a designated person role for managerial functions, to include a written contract setting out the job specifications, the time expectations and the fee arrangements for the role. This separate letter of appointment is subject to annual review by the board and must be made available to the Central Bank on request. It is worth noting that the Central Bank is amending its authorisation process for management companies and self-managed investment companies to require a copy of each designated person’s letter of appointment to be submitted, with immediate effect.
By Matheson.
