Raymond Chang, Chairman and CEO of CI Mutual Fund Management. - Contributed (FINAL)
Last week in Part One of our series on Corporate Governance, Canadian Mutual Fund Giant, CI Fund Management boss Raymond Chang outlined his company's response to the Ontario Securities Commission's (OSC) draft proposal of regulations on the governance of mutual fund management.
This week, Mr. Chang defines governance and how his company effectively utilises itwithin its corporate operations.
WHAT IS Governance? It is an understanding, but how do you define Governance?
My definition:
A combination of legislation, regulation and internal policies, procedures and guidelines to establish and guide ethical behaviour and conduct. Good Gover-nance is founded on integrity.
Good Governance is an organisation requires objectivity, maturity and independent oversight. It requires a leadership that believes in it and supports it and leads by example to set the standard. A fundamental component of Governance is Ethics.
Ethics, as the US Supreme Court Justice Potter Stewart observed, "is the difference between what you have a right to do and knowing what is the right thing to do".
It is about people and process.
It is about doing a job well.
Good Governance actually reduces risk (business accidents, bad press, loss of reputation).
Public company ownership: Senior Management Director 21 per cent (adjust for post 7/24).
Major (competitor) mutual fund company owns just under 20 per cent (via its mutual funds).
As of July 24/02 Sun Life owns 30 per cent.
Remember in the hands of the investing public.
Two areas of potentially conflicting interests:
1) The shareholders of CI Funds Inc. (i.e similar to any public Co.)
2) The unit holders in the products managed by CI Mutual Funds Inc.
POTENTIAL CONFLICTS OF INTEREST FOR THE CORPORATION
- Self interest
- Existing & potential shareholders versus the management
- Insiders know more about the company and its future than the investing
public.
What has CI done to mitigate the (potential) conflicts of interest at this
level?
- Board of Directors:
Mandate: to act on behalf of shareholders
- majority are independent of the management of CI
- independents understand the business and its industry
- independents have legal and business acumen
Audit Committee: only independents are members
Compensation Committee: only independents are members (While they receive guidance from the Managers, they also consult industry standards and competitor compensation). The independent directors decide and vote on the management compensation in the absence of the Managers.
- CEO and Chairman of the Board are two different people; in addition the
lead director is an independent board member
- Stock Options: we keep it reasonable; in total allocation
- Norman course issuer bid buy-back programme (CI tends to buy back same
number of shares as are granted in options)
- Insiders do not compete with the corporation in buying its shares: Shareholders
come first
- Corporate Policy incl. Insider trading rules (e.g. MacKenzie bid did not
leak prior to the trigger being pulled; insiders were not trading MacKenzie
stock)
- Blackout periods for the entire company surrounding release of quarterly
financial reports or any other disclosure of material non-public information.
Potential conflicts of Interest vis-a-vis the unit holders in products managed
by CI
- Self interest (again)
- Front running (by access persons). Access persons have access to products'
investments
- Manipulative investing
- Self dealing
What has CI done to mitigate these potential conflicts of interest?
- Board of Governors of CI's Mutual Funds
mandate: act on behalf of unit holders
three independents and two dependents (mgt)
The independent Governors have access to anything and anybody they deem important
to fulfil their mandate.
- Code of Ethics and Conduct
Monitoring of type of investments held in the portfolio (of CI's products/mutual funds)
Monitoring that funds stay within the legal, regulatory and company specific policies and guidelines
Monitoring who has access to material, non-public information related to CI's products
Monitoring personal trading of "Access Persons"
Monitoring maintenance confidentiality of portfolio content, client information and corporate insider information (e.g. MacKenzie bid; fund managers were not in the know; funds did not accumulate MacKenzie stock (so they might vote it)
The members of each Board (Director & Governors) are mutually exclusive and have unlimited access to each other.
All members are knowledgeable; they understand the business and the industry CI operates in.
Thus they are in a position to ask the right questions and judge Management's decisions.
CONCLUSION
At the end of the day, CI manages other people's money: either we manage it via our products or we use it via our shareholders contributions. In this capacity we owe a fiduciary duty to those who entrust us with their money. As fiduciaries, we are held to a higher standard of care in a court of law. As fiduciaries, our business existence depends on earning and maintaining the trust of our investors. CI is constantly monitored (by regulators, by the press, etc.) to ensure we remain worthy of that trust. A serious breach in ethics has the potential of causing serious, perhaps permanent, damage to an organization and possibly the industry in operates in. As multi-billionaire investor and business leader Warren Buffet stated:" it takes a lifetime to build a reputation; it takes seconds to ruin it".
It is important to understand what money can and cannot do, what money can and cannot buy.
Money cannot buy integrity, and integrity is everything. Integrity earns you the trust of people, who may then entrust the management of their capital or their affairs to you. This capital management may lead to improved rates of return for the investor, for the business and, as a consequence, for the economy as a whole. Conversely, the lack of integrity causes a lack of trust, which causes less return on and/or erosion of capital, and consequently, poorly functioning economies.
Look around you; look around the world, and recognises the correlation between good Governance including good ethics, and well performing organisations and economies, and high standards of living.
Governance and Ethics have to evolve into a "mind-set", a value system. Some people only behave ethically, because they try to avoid punishment. If there is no enforcement, if there is no reason to fear getting caught, some people will stop behaving ethically. If, however, good Governance and Ethics is part of a value system, getting caught or reward will have no influence over behaviour. An ethical individual, an ethical organisation, an ethical government, will always do the right thing, will always command respect, and will prosper by it.
