Irish funds' success shines light on boom in directorships
DUBLIN, Aug 8 (Reuters) - Despite a property crash, sovereign bailout and banking collapse, some have done very nicely out of Ireland's success as an international funds hub, anchored by tax exemptions and its position within the European Union.
The funds sector has notched up successive peaks in the number of funds attracted to the country, and total assets administered have nearly doubled to 2.3 trillion euros since 2009, bringing with it a windfall for Irish residents selling their services as directors.
People operating as full-time directors as well as lawyers and consultants to the industry are among those hired for roles that can generate an annual income of between 15,000 and 25,000 euros per fund.
With a workload that typically only picks up as quarterly board meetings near, some have been accumulating a sizeable portfolio of directorships, causing concern about their ability to safeguard investors' trillions.
It is not unusual for one person to sit on dozens of boards in the industry; Irish company records show at least seven directors have over 70 active directorships, and two over 100. Some of those positions are in funds companies, while others relate to special-purpose vehicles, used to repackage and sell loans, as well as other business areas.
The large number of board memberships is partly due to the common practice among fund promoters of sub-dividing their funds into standalone companies to keep their assets legally separate.
In such cases, multiple board meetings can be held concurrently, and the promoter of the funds, usually an investment manager based in London or New York, will give each director a lump sum, in some cases more than 100,000 euros, rather than pay them per fund.
John Donohoe, a Dublin-based funds director, says that means the number of clients a director has, rather than directorships, is a better measure of their ability to carry out their role.
Donohoe, chief executive of Carne Global Financial Services, which provides independent directors to funds, believes there should be a cap on the number of clients a director takes on.
"In a regulated environment, I don't think anyone should have more than 30 clients, and the right answer is somewhere between 20 and 30," said Donohoe, who has 15 funds clients but 35 directorships in Ireland and the Cayman Islands, reflecting the use of multiple companies for some funds.
"The reality is that in any industry or in any country you are going to find some people that may push things further than they really should."
Other industry figures agree the issue of directorships is a weak spot in Ireland's otherwise well-regarded system of corporate governance, but of the six non-executive directors interviewed by Reuters, only Donohoe agreed to be named.
A person can take any number of funds directorships in Ireland, but under a voluntary code introduced last year a fund's board must ensure that its members can discharge their responsibilities, given all their other directorships.
The central bank is currently reviewing minutes of board meetings and other data sources to see whether the code is being adhered to and whether further action, including the possibility of making it compulsory, is necessary.
Gareth Murphy, head of markets supervision at the central bank, said some people were taking on too many directorships.
"You have got a large number of funds and a large number of directors. There is always going to be some outliers there that need to be looked at," Murphy said in a recent interview.
Given the variety in the size and complexity of funds, Murphy said it was better to focus on the time directors devote to their duties rather than cap the number of directorships.
"We have to be quite careful not to go for crude solutions."
Funds are unusual in that they don't have employees, but delegate their functions, including investment decisions and the administration and custody of their assets, providing work for 12,000 people in Ireland, about 9,500 of them employed by fund administrators such as State Street, and the rest by law firms, auditors and consultancy groups.
Stewardship of the money ultimately rests with the board of directors, and since the 2008 financial crisis, the world's regulators are increasingly scrutinising their performance.
In the United States the Securities and Exchange Commission recently settled a civil suit accusing eight former directors of Morgan Keegan bond mutual funds of failing to police the portfolio managers they oversaw, allowing toxic mortgage assets to be over-valued prior to the crisis.
The regulator in the Cayman Islands is considering a host of corporate governance reforms after revelations a few years ago that some people there held hundreds of directorships. Investors with funds there are unable to verify how many directorships their directors have or whether there are conflicts of interest.
In Ireland, where the regime is much more transparent, the industry has been largely scandal-free.
"I have been 16-17 years in this industry, and in that time I have seen two frauds," said one Dublin-based director, who declined to be named. "It doesn't tend to happen because you have lots of checks and balances all the time."
CONFLICTS OF INTEREST
The calibre of funds directors has improved since the 1990s when the industry was in its infancy in Ireland.
"It has changed significantly. When I started you had retired lawyers or accountants doing an oversight role in a gentlemanly kind of way," said Declan O'Sullivan, a partner in the Dublin offices of international law firm Dechert.
Tougher regulation from Europe has engendered a professional class of director, including people who specialise solely in being funds' directors.
The central bank is also looking at the management of conflicts of interest as part of its review of fund managers' business models.
While directors are meant to represent the interests of the funds' shareholders, usually pension funds and institutional fund managers, some have a business relationship with the promoter, or investment manager, whose activities they are meant to police.
O'Sullivan and his colleagues at Dechert do not take on funds directorships to avoid such conflicts, but other lawyers still sit on boards.
"(Most) fund directors who work for the fund's law firm but are not working directly on the fund's legal brief ... have taken the stance that they are still independent directors, and I don't disagree with that, if they demonstrate that they are acting independently," said Donohoe.
The industry's voluntary code says the board must have at least one independent director who should not be attached to a company receiving professional fees from the fund.
"You could argue that they didn't go sufficiently far in terms of requiring independent directors. They only want one independent director out of two non-executives, but you could argue that perhaps they should have gone for two," said another funds' director, who declined to be named.