The Private Investor - Fall Winter 2019

GOOD GOVERNANCE.

What does it ACTUALLY
Mean?

By JAY SIMMON, CPA, CA, ICD.D, CEO of Durum Capital Inc.

he private capital
markets have
evolved substan-
tially in the area of
corporate governance, and
that transition is
something to celebrate.
The industry has come to
care deeply about protecting investor capital;
however, it has not always been that way.
Looking back at examples of governance gone
wrong has taught us a few key lessons about
what good governance looks like and what to
pay attention to as the industry continues to
evolve.

I started my career in insolvency and restructuring and I came to understand very quickly that many of the files that crossed my desk were a result of lack of oversight; companies or individuals falling victim to their blind spots due to lack of good governance. Over a decade ago, within the private capital markets space, I was approached to look at the restructuring of Platinum Equities, a series of real estate partnerships that raised millions of dollars by a brother-sister team who sat as both directors and management. The file didn’t just cross my desk, I stood face to face with investors who had trusted others with their hard-earned investments. The result? A widowed young mom who ended up destitute from the loss of life insurance proceeds from her late husband’s death; an elderly couple who worked a lifetime to save for retirement and were left with nothing; these stories enraged me. They enraged me to the point where I found myself losing sleep and ultimately charging into the securities commission to learn that they are not really mandated to oversee businesses once the capital has been raised.

Not long after there were a series of companies
who were successful at raising capital but who
also had no form of oversight or governance to
protect investors. The Harvest Group of
Companies raised millions of dollars for various
ventures which ended in disaster. In simple
terms, a lack of governance allowed for a series
of transactions outside the realm of the
investment with the CEO sitting on both sides
of the money transfer. The result? Again,
catastrophic losses of investor capital.

Another example in more recent years was a fund that marketed openly that a Board of Directors was in place. Once you peeled back the layer of who those individuals were, it turns out it was family or related parties who sat in director seats without having any relevant experience to provide reliable or effective oversight. What this eventually led to was, again, a series of backdoor transactions where investor dollars were being used outside the scope of business activities outlined within the Offering Memorandum. Though a Board of Directors was in place and were responsible for reviewing those transactions, a significant conflict existed without resolve. The result? Again, catastrophic loss.

Though these examples are difficult to reflect on, they have created a significant shift within the industry, teaching us all about not only the importance of governance but a few key things about what good governance actually means.

Governance, in its most basic form, does not need to be complicated. It is a collaboration of independent people and processes that provide oversight in order to protect stakeholders. Simple and basic principles include documented quarterly meetings, discussion with financial auditors, access to varying levels of management, transparency with stakeholders, and approval of budgets, among other things. Taking this concept a step further, the previous governance failures in the industry have also showcased that:

1. Directors cannot be beholden to the CEO or management

The board of directors must be independent. In
fact, their first responsibility is to hire and fire
the CEO. They must have the power to make
changes in the best interest of stakeholders. If
the CEO is not performing, the board of
directors must have the ability to edit as
required.

2. Relevant experience & reputation matter

It’s not enough to have a structure in place and simply say that a board of directors exists; there needs to be a collection of individuals with relevant experience and successes. These are individuals willing to lend their reputation to the business or the venture, and that reputation needs to mean something for both parties.

3. Independence matters

Independence of members eliminates conflicts that may arise as a result of relations to the manager. For example, family on the board of directors does not mitigate conflict, it creates it.

4. Mentorship matters

People deliver excellence for leaders they respect. Having high-calibre and relevant directors helps to ensure that management is staying focused and being held accountable for their performance. Above that, they act as mentors for management, providing guidance and expertise beyond just holding management accountable.

5. Diversity matters

It goes without saying, but people are different. They have different skill sets, experiences and perspectives. Getting the most out of your governance structure means diversifying the skill sets at the board of director level. The diversification of skills and experiences helps to ensure fulsome oversight.

Distilling this down, good governance is the combination of high-quality, relevant people willing to lend their reputation, who have the power and control to make changes within the organization and ultimately hold management accountable for delivering results.

Governance is only one of many pieces that make up successful businesses, but it is a piece that provides protection for investor capital. That, in turn, allows firms and entrepreneurs to access capital allowing for continued innovation and value creation for stakeholders. The private capital markets have evolved significantly to adopt good governance structures, and that is certainly something to celebrate.