In our scenario, an investment management company is controlled by the main equity owner, a strong personality who believes in fairness to employees and clients as well as wanting to be liked and respected within the market. The challenge is to achieve these goals whilst conforming to the FCA’s regulations, ensuring that systems and documented practices are adhered to, to provide clients and the FCA with proper accountability, as well as honesty and integrity.
There is a plethora of material relating to the various parties who have contributed to governance in financial services companies since the relaxed era of 2006-2007. With a high focus on regulation of banking practices, many senior directors resigned their posts rather than accept personal liability and criminal charges for attempting to manage their corporate responsibilities in good faith. Investment management companies come under the same umbrella – to be authorized for business and to perform successfully, the question of governance has to be paramount.
In this highly regulated industry, financial services companies have to satisfy the regulator, various institutions, divers clients and the Government. FCA compliance is of utmost importance and FCA guidance should be incorporated into the firm’s ethos.
Achieving the Twin Goals of Being Nice and Being Successful
Begin by defining the optimum organisation that should be in place to achieve success: an effective management board with high quality oversight is essential, coordinating all aspects of the executive members’ responsibilities, for example
Appointing NEDs is a popular process which can work well when appropriate directors can be identified and welcomed aboard; they will need to go through the approval process as Significant Influence Functions. As NEDs are not involved on a full time basis, procedures must be in place to ensure full information flow and communications records, as well as board minutes. They must to be able to challenge management and be an integral part of the company, not just for board meetings. Successful companies usually include NEDs on monthly management reports and often hold informal meetings, by way of imparting information and soliciting responses.
The investment and distribution functions can benefit from specific oversight committees. A board of specialists can and should challenge the management board to ensure that best practices and performances are being achieved. This is especially useful for companies with fewer in-house resources or limited expertise of all aspects, e.g. corporate law or experienced real estate investors. Being able to utilise external expertise to examine and review the company’s investment or marketing strategies, for example, can add extra dimensions to the organisation and also please the regulator.
An independent risk evaluator could be a valuable asset, bringing awareness of current practices and ensuring compliance with risk regulations. If an individual whose expertise fits the business requirements can’t be found, an alternative is to appoint a third party consulting firm. Other committees may also be useful to increase expertise within the organisation.
The above experts can also be used as sounding boards for various strategies, enabling the owner or core directors to present ideas for discussion with an independent panel of wider expertise, with common goals for the business, but covering different aspects.
Whilst keeping focus on your future vision, start working backwards to build the organisation for success. The combination of routes used to achieve this goal must reflect a culture of challenge to build a robust business. When the correct individuals and/or outside resources are providing the desired degree of expertise and independent thinking for the success of the company, senior management and key individuals can be assured that they are on target to meet future goals. Shared experience and knowledge is to everyone’s benefit.
The Balance of Challenge with a Controlling Ownership
Whilst the person or dominant partner who set up the company is still in control, they will be loath to relinquish any real power. Usually, the organisation has been built around their ideas and ideals with most of the ensuing success being attributable to their personal expertise, industry reputation and, most likely, considerable financial investment.
Often, such an entrepreneur has worked for a large organisation before becoming frustrated with inaction or interference from areas outside their control, motivating them to take a significant risk to start afresh. Many of the initial staff will have been recruited from their pool of contacts, underlining the importance of the owner-founder as a trusted leader.
That structure needs to evolve for the company to grow successfully. Here’s why:
◾ The owner is not the only person to have taken a risk. Employees may have left secure, well-paid jobs to work in the new venture, with an expectation of a more rewarding future as the company grows. They don’t expect to suffer the same frustrations of being held back within a vibrant, dynamic organisation.
◾ Clients will be initially introduced to the company through key individuals. Going forward, they will want evidence that the operation is ‘safe’ and that the heart of the business is overseen by sufficient trusted and wide-experienced heads. They will require assurance that key personnel are not stretched too thinly during expansion.
It is natural that the person or people whose ideas and actions started the business, and who have seen its successful growth to a point, will find it difficult to relinquish control. The dominant personality is unlikely to willingly share or hand over ultimate responsibility of a business he or she has created and nurtured . In reality, these concerns are unfounded.
The key point for owners is that they can be in control of the process. The business can be structured in a way that independent individuals with detailed expertise are in a position to advise and challenge but are without significant decision-making authority. Economic and control provisions should be kept separate in the company’s constitutional documents.
For example, owners can retain the right to appoint NEDs. This means that the owner can maintain control of the company’s direction by appointing or replacing individuals. It should not be an opportunity to populate the board with sycophantic ‘Yes’ people, thus giving the illusion of collective input. In such instances, senior management must be able to instigate remedial action.
With a correctly balanced set up and meticulous record-keeping, the owner can retain control of the business and its key decisions with the additional benefits of independent collective expertise in an advisory capacity, to challenge and test corporate stability and strengths for future robustness. A well planned business structure will be compliant with regulatory requirements and will satisfy existing and potential clients.