“Ethics in business is extremely important; your reputation is all you have in life.“ — Sir Freddie Laker
Corporate governance has been essential through the ages, and in recent years the need for it to be more robust has grown. Let us remember the crisis of 2008, the perfect financial storm, where the governing bodies of various financial institutions were unable to prevent risk, put their firms and investors at risk and precipitate the debacle that resulted in a global recession.
Just as there have been catastrophic events in the public capital markets that could have been prevented with better corporate governance, the private capital markets have been impacted in a different way. By not being publicly policed, private markets are more exposed to malpractices among their participants. Therefore, it is imperative to design, implement and monitor good corporate governance practices.
Corporate governance can have an internal and an external vision. The first is to describe the governance duties of all stakeholders. Responsibilities should be divided into supervisory functions, as well as the day-to-day execution and management of the investment policy. The external considers any work with external partners, which includes relationships with external managers and / or interested third parties. In addition, five parameters must be considered to have a correct corporate governance, which according to IFC are as follows.
1.Commitment to corporate governance
It all starts with the fund managers’ commitment, which is reflected in the fund’s strategy, in the relationship with service providers and in the interaction with other ecosystem partners. In addition, it should be reflected in corporate governance systems and policies, including ESG elements.
2. Structure and Functioning of the Fund Governing Bodies, Fund Manager / General Partner, Advisory Committee, and Investment Committee
It is important that each fund details and makes its decision-making process explicit and that it fulfills its fiduciary responsibility by truly caring and being loyal to its investors. Having a Limited Partners Advisory Committee (LPAC) helps in the resolution of conflicts of interest, approval of the portfolio valuation, and ensuring compliance with policies and contractual agreements.
The appointment of the investment committee and representation on the boards of directors of the companies in the portfolio are examples of the way in which the fund carries out its activities.
3. Control Environment: Internal Control Systems, Internal Audit Function (IA), External Audit, Risk Governance and Compliance
Recognizing the way in which the fund develops its investment thesis, exit strategy as well as internal policies such as regulatory compliance, audits and money laundering indicates the strength of internal corporate governance. Every fund should also have valuation policies, risk management systems, and external auditors.
4. Transparency and Disclosure
Transparency and reporting are fundamental pieces, among them it is necessary to consider the fund’s accounting, the portfolio monitoring policies, and the way in which the fund reports financial and non-financial information to its investors. This should also include full adherence to existing regulation and above all strict self-regulatory practices.
5. Treatment of Limited Partners, Asset Owners & Investors
A transparent relationship with investors is desirable, where there is frequent communication, such as annual meetings that include best market practices. In addition, it is important to define the compensation plan so that there is an alignment of expectations between the fund manager and the Limited Partners.
6. Governance of Stakeholder Engagement
All the previous elements should not forget the external communication mechanisms, which facilitates the relationship of the fund with the public and with entities with which it has relations on a regular basis.
Good corporate governance facilitates the development of Venture Capital funds activities by fostering lasting relationships with its investors and ecosystem partners. Having good corporate governance promotes transparency, integrity, and order in the operation of the fund management, increasing the protection of the interests and confidence of current investors, and attracting new investors. Failures usually occur when corporate governance does not exist or is quite lax, generating friction between the parties and putting the operation and even survival of the fund at risk.
“Corporate governance is concerned with holding the balance between economic and social goals and between individual and communal goals. The governance framework is there to encourage the efficient use of resources and equally to require accountability for the stewardship of those resources. The aim is to align as nearly as possible the interests of individuals, corporations and society.” — (Sir Adrian Cadbury, UK, Commission Report: Corporate Governance 1992)
Hector Shibata. Director of Investments & Portfolio at ACV a global Corporate Venture Capital (CVC) fund and Adjunct Professor for Entrepreneurial Finance.
Gonzalo Soriano. VC Investor at ACV.
ACV is an international Corporate Venture Capital (CVC) fund investing globally in Startups & VC funds.
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