What does it ACTUALLY
By JAY SIMMON, CPA, CA, ICD.D, CEO of Durum Capital Inc.
he private capital
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
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
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
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
38 THE PRIVATE INVESTOR | FALL + WINTER 2019