This weekend I saw the fantastic movie Gold, starring Matthew McConaughey.
Without giving any spoilers, I found myself thinking of how corporate governance processes function, or should function, in the commodities business. I know, I need to get out more, but the question is interesting nonetheless.
What if an asset manager of a fund identifies an investment opportunity into hot commodity project? The asset manager will want to get into the deal as fast as possible, but how does the management company ensure that the project is legit. In how much detail will you look at the asset, and on which experts can you rely? How much due diligence is enough?
History has taught us that in many cases the Achilles heel of any investment is over-reliance on others (often considered experts), and under-reliance on your own information and judgement. Until the end of 2016 an investment into the $1.3 Billion Platinum Oil and gas fund sounded great. And in more traditional assets, would you have questioned the expertise of Bernard Madoff until 2008?
I am encouraged by our clients’ approach that the duty of care goes further than the obvious, and that a sound governance process requires exceeding the minimum regulatory rules. But in our discussions with some other fund directors and service providers, still today we hear the phrase “it’s not our role to go into that much detail”. Unfortunately, in this business, the real requirements often become clear only after something bad has happened.
So what’s the solution? The only thing I can think of takes me back to the first piece of advice I got when I became a banker a long time ago:
Trust is good. Control is better.
Don’t worry, control does not mean that you have to do everything yourself. It just means that you need to ensure that you have access to the information, and make your own assessment. The good news is that with modern technology, much of this burden can be automated or at least made very efficient.
And who knows, perhaps being the best in class in transparent oversight will turn out to be a commercial advantage!