Improving the industry corporate governance

Hedge funds' corporate governance is one of my favorite subject. I wrote an article in January 2008 with the title "Hedge Funds and Corporate Governance: Who is really driving the car?". The article was providing insight into the role of the directors on hedge funds' boards and the reasons why they were very often falling to perform an efficient oversight on the fund's activities. I am a fervent believer that the sake of the hedge fund industry will go through the improvement of the funds' corporate governance.

I saw today a very interesting article in the FT about the discussion going on at the SEC about a rule allowing US investors to nominate company directors.Companies at present nominate their own directors. Shareholders have the right to vote, but not to nominate any directors, except through a difficult process that requires them to mail shareholders at their own expense. The new rule would allow large shareholders such as pension funds to nominate up to a quarter of a company’s board members.

The rule includes two provisions, one of which would allow shareholders who own from one per cent to 5 per cent of stock – depending on the company’s size – for at least one year, to nominate directors.

Hedge Fund's constituting documents are describing the type of voting right, if any, provided to shareholders in the funds. The right to elect or remove a director from the fund's board is not always granted to shareholders but rather is held by the directors themselves or by the holder of the fund's founder shares who is usually the investment manager. Also very often a shareholder has to represent at least 10% of the fund's assets in order to call for a shareholder meeting and submit a proposal to the other shareholders.

The current rule discussed by the SEC is clearly a signal by the regulators that directors should take their role more seriously if they don't want to be sanctioned by the company's shareholders. Hedge Funds should be adopting similar rules in order to improve the industry overall corporate governance and to empower the ones for whom it was created for, the shareholders.