Effective Corporate Governance in Asset Management Companies

Asset management companies (AMCs) are one of the types of capital market participants and play an important role in the financial system, therefore corporate governance is of particular importance for minimizing risks and protecting the assets of investment funds and the interests of clients who trust the management of their assets.

Corporate governance is a system of processes, principles and relationships aimed at ensuring the effective functioning of the company and the achievement of its goals, taking into account all interested parties (owners, clients, employees and the regulator).

The current legislation of Ukraine provides for the possibility of introducing one of two models of corporate governance: one-level or two-level structure.

Before choosing a corporate governance model for its implementation in the AMC, one should take into account certain criteria that the company meets, in particular:

• Number of employees;
• Number of clients to whom services are provided;
• The list of services provided by the company, the volume and nature of operations carried out by the AMC;
• Number of participants/owners of the company.

A two-level management structure is a system of corporate governance in which there are two main levels of management: the supervisory board (upper level) and the executive body (lower level). This model is widely used in Europe, in particular, in Germany, France and some other countries. It has certain features that distinguish it from a single-level management structure.

The main features of the two-level management structure:

1. Separation of control and management functions between various bodies.

• In a two-tier structure, the supervisory board is responsible for the overall supervision and control of the company's activities, while the executive body (Board of Directors) deals with day-to-day management and operational activities.
• This separation avoids conflicts of interest when the same person or group of people simultaneously controls and manages the company.

2. Supervisory Board.

• The main function of the Supervisory Board is to monitor the activities of the executive body and represent the interests of the owners. He approves the company's key decisions, including strategy, investments and major financial operations.
• The supervisory board may include independent members or employee representatives, which helps ensure a balance of interests of various parties.

3. Executive body.

• The executive body manages the company's operational activities and is responsible for the implementation of the strategy approved by the Supervisory Board.
• The executive body is accountable to the Supervisory Board, which provides constant monitoring and control of its activities.

4. Enhanced control and transparency.

• Since the Supervisory Council is a separate body, it increases the level of control over the executive body and ensures greater transparency of management decisions.
• Such a system allows avoiding situations when the executive body can act in its own interests to the detriment of the owners or the company as a whole.

5. Protection of the interests of owners and employees.

• In many countries where a two-level structure is used, the supervisory board includes representatives of employees, which allows their interests to be taken into account in the management decisions of the company. This contributes to a better social climate and strengthening of trust within the company.

Advantages of the two-level structure:

• Better control and balance of power between controlling and governing bodies.
• Minimization of the risk of misuse and conflict of interests.
• Strengthening transparency in making important decisions.
• Protection of the interests of owners, employees and other interested parties.

Disadvantages of the two-level structure:

• A more complex decision-making system due to the need to coordinate actions between two levels of management.
• Possible delay in decision-making due to bureaucratic procedures.
• The need to incur expenses for the maintenance of both bodies.

If the AMC has one owner who does not participate in operational activities or it is a company with more than one owner, then a two-level management structure should definitely be preferred. After all, such a model will give AMC owners confidence in the minimization of possible risks, will ensure proper control over the execution of executive orders. functions.

If the asset management company has one owner who directly manages the operational activities, preference should definitely be given to a collegial executive body and a single-level management structure. A professional participant may apply a one-level management structure only on the condition that the functions and powers of the Board of Directors and its committees in the charter and/or other internal documents of the licensee will meet the requirements of the supervisory body determined by the applicable legislation.

Although the current legislation of Ukraine does not oblige the AMC to create a Board of Directors in companies with one owner actively participating in operational activities, the introduction of a collegial executive body is expedient for the following reasons:

1. Distribution of duties and responsibilities. When the owner of the AMC independently manages all aspects of the business, there is a risk of overloading and making decisions under pressure. The collegial body allows redistribution of responsibility between executive and non-executive directors, which promotes a more balanced approach to management and reduces the risk of mistakes due to fatigue or haste.
2. Transparency and accountability. The presence of a collegial governing body helps ensure greater transparency in decision-making and business management. This reduces the risk of abuse and improves control over the activities of the asset management company, especially if it attracts third-party investors, cooperates with banks and regulators.
3. Risk management. A collective approach to making important strategic decisions allows you to take into account different opinions and analyze potential risks in more detail. This increases the possibility of avoiding significant mistakes or rash steps that may have negative consequences for the asset management company.
4. Stability and continuity of management. The option of corporate governance, which implies the concentration of managerial and executive functions in the same hands, carries a very significant risk. If the owner of the AMC is the sole executive director, then any absence (due to illness, travel, etc.) may negatively affect the operational activities of the asset management company. And in the event of the death of such an owner, the activity of the AMC will be temporarily blocked until the heirs acquire the right to the fate of the enterprise. The collegial body guarantees that the management of the company does not depend on one person, which increases the stability of the business.
5. Possibility of growth. For small AMCs, where one owner manages all processes, the introduction of a collegial body may seem superfluous. However, with the growth of the business, such a structure allows to quickly scale transactions, attract external specialists and investors, and also moves to more formal and effective management models.

Thus, the collegial executive body provides more effective management and reduces the company's dependence on one manager, which has a positive effect on long-term stability and business development.

Therefore, it is necessary to be responsible for the choice of the corporate governance model in your AMC, because high-quality corporate governance contributes to increasing client trust, reducing risks, and strengthening the company's position on the capital markets.