Issue: December 08/February 09
Towards better governance
The operational structure of most retirement funds is problematic in that management vests with its board of trustees but most of the work is outsourced. This structure amplifies risk and increases the need for policies to ensure the fund’s wellbeing. The structure in umbrella arrangements becomes more complex, as management at a distance can only be mitigated by well-documented governance procedures.
In development of the policies, procedures and risk-management strategies, both boards and management committees need a defined project for implementation of good governance:
In reality, many funds are managed by trustees who are part-timers. They rely on administrators, brokers and consultants to run the funds by advice, thus relinquishing effective control and in some cases exposing the members, board, and consultants to unwarranted risk. The Regulator has indicated that boards must take firm control of funds in execution of their fiduciary duties.
The solution to the risky management structures prevalent in many funds is the implementation of practical governance measures that have been adapted for each fund in a Fund Governance Guide. In reality, good fund governance is the only key to risk mitigation. Until a better system of running funds is mooted, the alternatives are:
Litigate for stronger markets
Although there is little evidence of vigorous private securities litigation in SA, studies show that private enforcement creates stronger markets and promotes more fairness, openness and transparency than either regulation or government enforcement.
In support of the comments by Robert Gaudet (Letters, TT Sept-Nov), I refer to a recent study by scholars at Harvard, Yale, and Dartmouth universities. It found “strong evidence that laws mandating disclosure and facilitating private enforcement through liability rules benefit stock markets [and there is] little evidence that public enforcement benefits stock markets.”
This study, entitled What Works in Securities Laws?, analysed the laws of 49 countries to consider the effects of securities laws on stock market development. It examined the extent to which each regime relied on either private enforcement or government regulation. Overall, the study determined that stronger markets were fostered in countries that encouraged the private enforcement of securities laws through the combination of investor-driven lawsuits and government legislation of strong laws that protect shareholder interests, encourage disclosure and provide sufficient private remedies. Conversely, the study found little evidence that governmental regulation – or even the threat of criminal sanctions – contributed positively to market stability or performance.
Fortunately for the SA shareholder, strong disclosure rules and laws in the US ensure that adequate remedies exist to recover shareholder losses due to directors’ and officers’ fraud or malfeasance. Fund managers and pension plan trustees must ensure that beneficiaries’ assets are protected. So long as they are invested even indirectly in the US, they can use US laws intended to keep American markets fair and transparent.
In the complex global markets where SA funds invest, asset protection and asset recovery through litigation should be part of an overall strategy to protect assets and enhance shareholder returns.
Michael A Swick,