Guidelines of conduct as a manager
The manager should establish systems and processes to ensure that the constitutional terms are monitored and adhered to, and should confirm to the vehicle, non-executive officers, investor representatives and investors that the vehicle is compliant with its constitutional terms.
The contractual obligations of the manager will normally include the obligation to ensure compliance by the vehicle with its constitutional terms. These will usually be disclosed to investors and potential investors through a prospectus or information memorandum, which would include the investment strategy for the vehicle and the initial business plan.
The manager needs to be fully aware of the constitutional terms, and therefore able to confirm to the vehicle, non-executive officers, investor representatives and investors that the vehicle is compliant with its constitutional terms. The constitutional documents of the vehicle should also set out the remedies that are available to investors and others if there is a breach.
The constitutional terms should contain a clear investment policy setting well-defined restrictions and address how these principles and best practices should be applied in practice by those involved in the vehicle. They should be stated as fully and completely as possible, thus creating binding contractual obligations for compliance by the vehicle and its investors.
The manager should adopt the corporate governance best practices as a matter of policy from the outset of the vehicle. Thereafter the manager should assess the extent to which the vehicle complies with these best practices, and should report on compliance in the vehicle’s annual report or elsewhere, explaining the reasons for any departures from the best practices. Investors will then be able to form their own opinions on the corporate governance of the vehicle.
The constitutional terms should set out the role of the non-executive officer, investor representatives and investors in relation to decision-making on reserved issues.
At the inception of a vehicle investors should agree to certain key parameters of the vehicle. Any changes in or breaches of such parameters would be decisions reserved for investors such as:
- the vehicle’s constitutional terms;
- the vehicle’s investment strategy;
- the timing of the vehicle and mechanisms for termination;
- the debt restrictions for the vehicle;
- the vehicle’s liquidity mechanism;
- the removal or replacement of the manager; and
- the manager’s fee structure.
Examples of reserved matters for non-executive officers or investor representatives may include:
- annual business plan;
- resolving conflicts of interest;
- changes to the external valuer and significant changes to the valuation methodology;
- changes to the external auditor, or to accounting principles or practices, where these are likely to have a significant impact on accounting treatment;
- matters considered by the permanent risk management function;
- appointment of external advisers to represent investors on specific issues, such as those relating to risk identification and management;
- changes in key personnel including appointment of replacements;
- any circumstances where there is the risk of investor liability;
- matters of confidentiality, in cases where the nature of the investment and the relative market are particularly sensitive.
For such reserved issues, investors would expect the manager to provide them, or non-executive officers or investor representatives, with appropriate information on which to base their decision, including any professional advice. Where there is to be prior consultation between non-executive officers and investors, investors would expect such consultation and subsequent reporting to be conducted on a timely basis.
As the number of investors in a vehicle grows, so a lesser threshold for key decisions is likely to be more appropriate. Open end vehicles with established liquidity mechanisms enabling investors to exit may offer less opportunity for influence or control by investors than closed end vehicles, where the investors’ ability to exit the vehicle may be very limited.
While approval of the annual business plan may not be a matter reserved for the decision of non-executive officers or investor representatives, it is best practice for the manager to present the annual business plan to investors each year and establish a mechanism by which they can take feedback. In this way investors can make their views on the annual business plan known to the manager.
See section 2 of the Corporate Governance Assessment tool.
The constitutional terms should set out the way equity (or debt investments) is issued and redeemed in a vehicle.
The manager should clearly articulate how equity (or debt investment) is to be issued and redeemed. In the case of closed end vehicles, the issue of equity (or debt investment) is likely to be through one or more initial closings where a number of investors subscribe at the same time, with redemption being towards the end of the life of the vehicle. In the case of open end vehicles, the process of issue and redemption of equity (or debt investment) would be on a periodic basis. This may be annually, quarterly, monthly or even daily. The method of valuation of the equity (or debt investment) should be clearly set out, including the underlying valuation and accounting principles applied. In some jurisdictions and vehicle structures, the mechanism is prescribed by legislation or government regulations.
Vehicle extensions provide an opportunity for the manager to review the corporate governance with investors.
Where the manager presents proposals for an extension of the life of the vehicle or a short run-off period to allow properties to be sold (which is not a fixed extension specified in the constitutional terms), this is in effect a new vehicle and provides an opportunity to review the constitutional terms of the vehicle.
Guidelines of conduct as a non-executive officer or investor representative
Non-executive officers or investor representatives should ensure that the manager has in place adequate systems to monitor the extent of compliance with the vehicle’s constitutional terms.
Since the manager is obliged to ensure that the vehicle complies with its constitutional terms, the role of the non-executive officer or investor representative is to monitor compliance through receiving reports and having regular meetings with the manager. The non-executive officer or investor representative should have the ability to engage advisors (at the cost of the vehicle) to assist with legal or technical matters.
In circumstances where the termination of the manager’s mandate is activated, the non-executive officers or investor representatives should oversee the process to ensure stability during the transitional period.
Non-executive officers (where independent of investors) are expected to act as mediators between investors and managers and to review with investors the consequences and costs associated with the process of manager change.
Guidelines of conduct as an investor
Investors should fully understand the constitutional terms before investing. Acceptance of the constitutional terms is demonstrated by signing the subscription agreement.
In order to allow an investor to fully understand the investment, the constitutional terms should state the vehicle strategy and vehicle operation, the relationship and obligations between investors and the vehicle (including investor decisions, meetings and votes), and the liquidity opportunities for investors, including the eventual exit procedures upon winding-up, if appropriate. Investors are expected to comply with these obligations. The constitutional terms should be clear and unambiguous, and include the appropriate jurisdiction in which meetings to decide on important issues which are reserved to investors are to be held.