During Fiscal Year 2019, Investcorp Holdings B.S.C. (“Investcorp”) commenced procedures to re-align its operational structure, and in February 2019, the Shareholders of Investcorp approved (1) the transfer of Investcorp CBB-regulated activities to Investcorp Financial Services B.S.C.(c), its wholly-owned subsidiary; and (2) the voluntary surrender of its wholesale banking license and its conversion into a holding company. The process of re-alignment, surrender and conversion was ongoing at June 30, 2019 and was completed in September 2019.
The information that follows is accurate as at June 30, 2019.
Investcorp views corporate governance as the manner in which members of the Board of Directors, shareholders, investors, management and employees of Investcorp are organized and how they operate in practice. Good corporate governance involves keeping business practice above reproach and thus retaining the trust and confidence of all the stakeholders who enable Investcorp to operate, thrive and prosper.
Investcorp makes large investments in mostly illiquid asset classes such as corporate and real estate investments. It places a large proportion of these investments with clients and retains a portion for its own balance sheet. These investment activities operate with above-average risk levels and have led to the development of a comprehensive risk management infrastructure and strong corporate governance over the past 37 years. Investcorp’s corporate governance practices have been structured around the following three principles:
i. alignment of interests among shareholders, clients and management combined with protection of lenders’ interests;
ii. transparency of reporting and actions plus proactive risk control; and
iii. collective decision-making.
At June 30, 2019, Investcorp’s corporate governance is subject to the CBB’s High Level Controls Module, (‘Module HC’) which incorporates the Corporate Governance Code of the Kingdom of Bahrain. Please see the Fiscal Year 2019 Corporate Governance Report for disclosure regarding Investcorp’s compliance with Module HC.
i. Alignment of interests. A central tenet of Investcorp’s philosophy is to ensure that interests among shareholders, clients and management are optimally aligned and that lender interests are well protected.
The alignment of interest is ensured by the following mechanisms:
Co-investments: Clients, shareholders and management all participate in each of Investcorp’s investment products. Investcorp retains a stake in each private equity or real estate investment transaction, placing the balance with clients. Investcorp also invests a portion of its assets in its absolute return investment products and the products of the credit management business. Hence, through ownership of Investcorp, shareholders indirectly participate in each of the investment products.
In addition, Investcorp’s employees co-invest alongside clients and Investcorp in these investment products. As a result, all three groups are collectively exposed to the same risks and share the same outcomes. This emphasis on co-investment ensures that all stakeholders are motivated to grow Investcorp and enhance its value through the generation of superior risk-adjusted returns in each of Investcorp’s products.
Performance-based incentive compensation: In addition, consistent with industry practice, Investcorp’s investment professionals participate in performance-based investment carried interest programs whereby a certain variable portion of exit proceeds due to investors from the realization of their investments is shared with the investment professionals, provided that a certain pre-established minimum client investment performance objective is satisfied on the underlying investment.
In addition, the overall compensation paid to members of senior management and other Investcorp executives is highly correlated with Investcorp’s net income. Investcorp’s net income is driven by its ability to acquire, place, manage and realize investments and realize gains from investments on its balance sheet (franchise value). The franchise value, in turn, depends on management’s ability to provide long-term value to Investcorp’s clients and shareholders and protection for its creditors.
Furthermore, all of Investcorp’s employees at the level of Principal and Managing Director who are above designated levels of remuneration are required to defer a percentage of their variable (incentive) remuneration and utilize a portion of that deferred remuneration to purchase beneficial interests in Investcorp’s Ordinary Shares through the ISOPs. These beneficial interests are subject to vesting requirements.
In this manner, Investcorp’s executive compensation programs play a critical role in aligning management’s interests with the interests of shareholders, clients and lenders.
The aggregate amount of compensation paid to senior management in respect of FY19, including variable remuneration that is required to be deferred and utilized to purchase beneficial interests in Investcorp’s Ordinary Shares that are subject to vesting requirements, is disclosed in Note 31 of the consolidated financial statements of Investcorp.
The names of the members of senior management and information regarding their roles within Investcorp and their professional backgrounds is included in the Managing Directors, Principals and Professional Staff section of this Annual Report.
Further information regarding the Investcorp Group’s remuneration policies and practices is provided in the Fiscal Year 2019 Corporate Governance Report.
ii. Transparency and risk control. Transparency at Investcorp involves the open and proactive discussion of issues and problems with all stakeholders. The role and nature of the Board of Directors and its committees and Investcorp’s management structure are vital elements of an Investcorp Group-wide framework for mitigating risks, allocating resources and making decisions with full accountability based on all relevant information.
Board of Directors
Under the Articles of Association of Investcorp at June 30, 2019, the Board of Directors consists of not less than five and not more than 15 Directors, and the number of Directors is determined by shareholder resolution.
The size of the Board of Directors was set at 12 by action of the shareholders at the Ordinary General Meeting of Shareholders held on September 27, 2016 (the ‘September 2016 OGM’) and increased to 14 by action of the shareholders at the Ordinary General Meeting of Shareholders held on January 31, 2017 (the “January 2017 OGM”). At the September 2016 OGM, out of the 12 then current Directors of Investcorp, 9 were re-elected for a three year term expiring at the 2019 Ordinary General Meeting (the “September 2019 OGM”). Three Directors who had been newly appointed prior to the 2016 OGM to fill vacancies arising on the Board, were also appointed to the Board of Directors for a three year term that will expire at the September 2019 OGM. At the January 2017 OGM, two new Directors, Sheikh Abdul Rahman Bin Saud Al-Thani, and Mr. Abdullah Saud Alhumaidhi, were appointed to the Board of Directors for a term that will expire at the September 2019 OGM, bringing the total number of the Directors on the Board to 14.
Effective October 1, 2017, following Mr. Kirdar’s retirement as the Chairman of the Board of Directors, Dr. Yousef Hamad Al Ebraheem, the then current Vice-Chairman of the Board of Directors, was appointed as the new Chairman of the Board of Directors. Mr. Khalid Rashid Al Zayani was appointed as the new Vice-Chairman of the Board of Directors effective that same day.
There is no cumulative voting in Director elections.
Each Director has signed a formal written appointment letter agreement which addresses a number of matters, including the Director’s duties and responsibilities in serving on the Board of Directors, the fact that annual remuneration for service as a Director is subject to the approval of the shareholders of Investcorp, his entitlement to expense reimbursement and access to independent professional advice when needed. There are no arrangements in effect relating to the termination of any Director.
The Corporate Governance Committee of the Board of Directors has developed and the Board of Directors has approved a formal induction program for new Directors that includes briefings on (i) the duties and responsibilities of Directors;
(ii) Investcorp’s investing lines of business; (iii) Investcorp’s financial position; and (iv) key strategic issues.
The Board of Directors is ultimately accountable and responsible for the strategy and business performance of Investcorp and its subsidiaries. The specific responsibilities of the Board of Directors are as follows:
- ensuring that financial statements are prepared which accurately disclose Investcorp’s financial position;
- monitoring the implementation of strategy by management;
- monitoring management performance and determining whether to approve recommendations for the remuneration of senior management;
- convening and preparing the agenda for shareholders meetings;
- monitoring conflicts of interest and preventing abusive related party transactions;
- assuring equitable treatment of shareholders, including minority shareholders;
- the adoption and annual review of Investcorp’s strategy, provided that, as part of the strategy review process, the Board is responsible for:
- reviewing Investcorp’s business plans and the inherent level of risk in these plans;
- assessing the adequacy of capital to support the business risks of Investcorp;
- setting performance and other business objectives; and
- overseeing major capital expenditures, divestitures and acquisitions
- ensuring that an adequate, effective, comprehensive and transparent corporate governance framework is in place;
- ensuring that an adequate and effective risk management framework and a sound risk management culture is established throughout Investcorp;
- adopting and reviewing the systems and controls framework of Investcorp to ensure that this framework, including Investcorp’s Board structure and organisational structure, is appropriate for Investcorp’s business and associated risks;
- adopting and reviewing management structure and responsibilities;
- putting in place effective policies and procedures for approving budgets and reviewing performance against those budgets and key performance indicators, and the management of Investcorp’s compliance risk; and
- establishing corporate standards for itself, senior management and all other employees, including policies and procedures for the identification, disclosure, prevention or strict limitation of conflicts of interest.
The Directors’ names, years of service on the Board of Directors, other directorships held by them, attendance of Board of Directors meetings held during Fiscal Year 2019 and the aggregate remuneration proposed to be paid to the Directors in respect of Fiscal Year 2019 are reported in the Fiscal Year 2019 Corporate Governance Report.
The approval of the Board of Directors is required for material matters, including the business plan and budget for each fiscal year, capital raising, capital markets and other financing transactions, Investcorp Group-wide risk limits and employee remuneration plans.
During Fiscal Year 2019, all of the Directors of Investcorp other than H.E. Mohammed Bin Mahfoodh Bin Saad Al Ardhi, the Executive Chairman of Investcorp, were non-executive Directors. In line with the requirements of Module HC, the Board of Directors determines the independence of the Directors each year. The most recent determination of the independence of the Directors made by the Board of Directors, which was made in June 2019, is reported in the Fiscal Year 2019 Corporate Governance Report.
The Board of Directors established four standing Executive Committees as follows: the Audit and Risk Committee, the Corporate Governance Committee the Executive Committee for Administrative Policy, and the Executive Committee for Investment Policy. The first three committees are described below. The Executive Committee for Investment Policy was dissolved during Fiscal Year 2019 and is therefore not included in the description.
The Audit and Risk Committee (formerly, the Audit Committee) is responsible for the oversight of Investcorp’s internal audit, external audit, risk management and compliance functions. Investcorp’s external auditor and the head of the Internal Audit department, the head of Compliance, and the head of the Risk Management department report to the Audit and Risk Committee.
The members of the Audit and Risk Committee are appointed by the Board of Directors, and at June 30, 2019, the Committee had three members. Consistent with Module HC, none of the members of the Audit and Risk Committee has any other Board responsibilities that could conflict with his obligations as a member of the Audit and Risk Committee. The Audit and Risk Committee is required to meet at least four times each fiscal year.
The responsibilities of the Audit and Risk Committee include:
- the selection, appointment, remuneration, oversight and termination, where appropriate, of the external auditor, including monitoring the rotation arrangements for the audit engagement partners and the performance of the external auditor;
- determining the independence of the external auditor once a year;
- reviewing and discussing with the external auditor the scope and results of the annual audit of Investcorp’s financial statements and the half-year financial statements reviewed by the external auditors;
- reviewing Investcorp’s accounting and financial practices, reporting systems and internal controls;
- the appointment and termination, where appropriate, of the head of the Internal Audit department and reviewing the budget allocated to the Internal Audit department;
- the appointment and termination, where appropriate, of the head of Compliance and reviewing the budget allocated to the Compliance function;
- reviewing the activities, performance and adequacy of Investcorp’s internal audit (including the independence of the internal audit function and reviewing the internal audit plan) and compliance personnel and procedures;
- reviewing the adequacy of Investcorp’s internal controls and risk management systems;
- reviewing the risk management function, including the independence and authority of its reporting obligations and reviewing with the head of Risk Management the adequacy and effectiveness of Investcorp’s risk management policies and methodologies;
- overseeing Investcorp’s compliance with legal and regulatory requirements and ensuring that Investcorp communicates with shareholders and relevant stakeholders (internal and external) openly and properly;
- review and supervise the implementation of, enforcement of and adherence to, the Investcorp Group Code of Conduct; and
- overseeing any special investigations the Committee deems necessary to meet its responsibilities, including any investigation required to be conducted by Investcorp’s Whistleblowing Procedures.
The Corporate Governance Committee is responsible for overseeing Investcorp’s corporate governance. The members of the Corporate Governance Committee are appointed by the Board of Directors, and at June 30, 2019, the Committee had four members. The Corporate Governance Committee is required to meet at least twice each fiscal year.
The Corporate Governance Committee’s responsibilities include:
- developing for consideration and approval by the Board of Directors, and recommending changes to the Board of Directors from time to time in, Investcorp’s corporate governance guidelines, which constitute Investcorp’s corporate governance policy framework;
- overseeing Investcorp’s implementation of the Corporate Governance Code of the Kingdom of Bahrain;
- overseeing a formal and tailored induction program for newly appointed Directors, to which current Directors must be invited; and
- overseeing Directors’ corporate governance educational activities.
In addition, as required by Investcorp’s Conflicts of Interest Policies and Procedures for Members of the Board of Directors, Senior Management and Central Bank of Bahrain Approved Persons (the ‘Conflicts of Interest Policies and Procedures’), the Corporate Governance Committee is responsible for considering any report of an actual or potential conflict of interest involving any Director, any member of senior management or any less senior executive approved by the CBB to perform his or her function (collectively, ‘Covered Persons’) and making a recommendation to the Board of Directors regarding such actual or potential conflict of interest.
At June 30, 2019, the Executive Committee for Administrative Policy (“ECAP”) functioned as (i) a nominating committee; (ii) a remuneration committee; and (iii) an administrative policy committee. The members of the Executive Committee for Administrative Policy are appointed by the Board of Directors, and at June 30, 2019, the Committee had four members. The Committee is required to meet at least two times a year.
When acting as a nominating committee, its responsibilities include:
- making recommendations to the Board from time to time as to changes ECAP believes to be desirable to the size of the Board or any committee of the Board;
- identifying persons qualified to become Chief Executive Officer, Chief Financial Officer, Corporate Secretary and any other officers of Investcorp considered appropriate by the Board, with the exception of the appointment of the internal auditor and the head of compliance, which will be the responsibility of the Audit and Risk Committee;
- whenever a vacancy arises (including a vacancy resulting from an increase in the size of the Board), identifying persons qualified to become members of the Board and recommending to the Board a person to fill the vacancy either through appointment by the Board or through shareholder election;
- making recommendations to the Board regarding candidates for Board memberships to be included by the Board on the agenda for the next annual shareholders meeting;
- identifying Board members qualified to fill vacancies on any committee of the Board and recommending to the Board that such person be appointed to such committee;
- overseeing succession planning and designing a plan for orderly succession and replacement of officers including replacement in the event of an emergency or other unforeseeable vacancy, ensuring appropriate resources are available;
- making recommendations to the Board from time to time as to changes ECAP believes to be desirable in the structure and job descriptions of Investcorp’s officers including the Executive Chairman and Co-Chief Executive Officers, and preparing terms of reference for each vacancy stating the job responsibilities, qualifications needed and other relevant matters, including integrity, technical and managerial competence, and experience; and
- recommending persons to fill specific officer vacancies including Executive Chairman and Co-Chief Executive Officers, considering criteria such as those referred to above.
When acting as a remuneration committee, its responsibilities include:
- considering and making specific recommendations to the Board regarding Investcorp’s remuneration policies (which policies should be approved by the shareholders) and individual remuneration packages for approved persons, material risk takers (as such terms are defined by the Central Bank of Bahrain) and other members of senior management;
- considering, and making recommendations to the Board regarding, remuneration to be paid to Directors based on their attendance of Board meetings and performance, subject to compliance with Article 188 of the Bahrain Commercial Companies Law;
- considering and approving remuneration packages for each approved person and material risk taker, as well as the total variable remuneration to be distributed, taking into account all forms of remuneration, ensuring that such compensation is consistent with Investcorp’s corporate values and reflects an evaluation of performance in implementing agreed corporate goals, objectives, strategy and business plans;
- approving individual remuneration packages for other Managing Directors and Principals, taking into account all forms of remuneration referred to above, ensuring that such compensation is consistent with Investcorp’s corporate values and reflects an evaluation of performance in implementing agreed corporate goals, objectives, strategy and business plans; and
- approving, monitoring and reviewing the remuneration system to ensure the system operates as intended.
- When acting as an administrative policy committee, its responsibilities include:
- the review and approval of the Executive Chairman’s recommendations for corporate and administrative policies;
- the review and approval of the Executive Chairman’s recommendations for certain capital expenditures by Investcorp above a specified threshold amount;
- the review and approval of the Executive Chairman’s recommendations with respect to any other administrative matter delegated to ECAP by the Board; and
- overseeing the charitable contributions made by Investcorp and its consolidated subsidiaries.
The names of the members of each of the Executive Committees, their attendance at their relevant Executive Committee meetings during Fiscal Year 2019 and the remuneration proposed to be paid to Directors for their Executive Committee service during Fiscal Year 2019 is reported in the Fiscal Year 2019 Corporate Governance Report.
During Fiscal Year 2019, the Board of Directors evaluated the performance of the Board of Directors as a whole, each Executive Committee and each Director and the Board will continue such evaluations each year going forward. Information regarding the evaluation conducted during Fiscal Year 2019 is presented in the Fiscal Year 2019 Corporate Governance Report.
A report regarding the evaluations conducted each year is also provided at each OGM.
For information regarding related party transactions, please see Note 32 to the consolidated financial statements of Investcorp.
The Board of Directors has adopted the Conflicts of Interest Policies and Procedures that apply to all Covered Persons. A conflict of interest exists when any activity, interest or relationship of a Covered Person interferes with or could reasonably be expected to interfere with the Covered Person’s ability to act in the best interests of Investcorp, including if a Covered Person has a personal interest in a transaction to which Investcorp is or may become a party. The policy provides that a Covered Person’s investment in Investcorp securities, Investcorp transactions and/or Investcorp products on the same terms as are extended to other similarly situated persons, which includes non-Covered Persons, will not be considered to give rise to a conflict of interest.
The Conflicts of Interest Policies and Procedures prohibit Covered Persons from engaging in certain activities, including participating in any discussion or decision-making or vote that involves a subject in which a conflict of interest exists, and requires the disclosure of any existing or potential conflict of interest with respect to any Director to the Executive Chairman’s Office who will in turn report it to the Corporate Governance Committee. The Corporate Governance Committee is required to consider the matter and report to the Board of Directors, which ultimately must determine how to proceed and whether to approve any transaction in which a conflict of interest exists. If a conflict of interest involves a Director, that Director should not participate in any Board of Directors discussion regarding, or vote on, that transaction.
Additionally, each member of senior management and each other Approved Person should report any actual or potential conflict of interest to the Chief Administrative Officer who will in turn report it to the Corporate Governance Committee. The Corporate Governance Committee is required to consider the matter and report to the Board of Directors regarding such actual or potential conflict of interest. Such member of senior management or other Approved Person should not be present at any meeting of the Corporate Governance Committee at which the actual or potential conflict of interest is discussed.
To ensure that any existing or potential conflict of interest is identified, Directors and members of senior management are required to periodically complete a questionnaire. The questionnaire requires disclosure of the companies in which directorships are held and interests held in other entities (whether as a shareholder of 5% or more of the voting shares, a manager or some other form of significant participation).
The Board of Directors has adopted the Investcorp Group Code of Conduct, which applies to the Directors of Investcorp and all Investcorp employees. On an annual basis, all Investcorp employees are required to certify in writing their compliance with the Code of Conduct. A copy of the Code of Conduct is printed as an Annex to the Fiscal Year 2019 Corporate Governance Report.
Transparency for other stakeholders
It is the policy of Investcorp to provide to its shareholders, clients, creditors and other stakeholders public disclosure that is fair, transparent, comprehensive and timely, and the Board of Directors has adopted a Public Disclosure Policy and Procedures Statement which includes internal review procedures to ensure that the standards of this policy are satisfied. In accordance with this Policy and Procedures Statement, all information relating to Investcorp that is publicly disclosed is made available on Investcorp’s website promptly after such disclosure is made and Investcorp’s financial statements for at least the last five years are maintained on the Investcorp website at all times. A copy of the Public Disclosure Policy and Procedures also is available on Investcorp’s website.
In addition to publishing its annual audited financial statements, Investcorp publishes its unaudited financial statements for the first six months of its financial year (July-December) and shareholder updates for the first three (July-September) and nine months of its financial year (July-March). An annual shareholders meeting, in addition to the OGM, provides further information and an opportunity for an exchange of opinions and ideas. The Placement and Relationship Management (‘PRM’) team and several senior members of the management team also periodically meet with shareholders in one-to-one meetings. Clients have direct, ongoing access to the PRM team and investment professionals. Clients are provided with a detailed written review of each investment in their portfolio every six months, and they regularly meet with PRM team members to discuss their current portfolio and new investment opportunities. Periodically, clients have the opportunity to meet the management teams of their portfolio companies. Lenders receive semi-annual updates on the health of the business and have direct, ongoing access to the members of the finance team, usually through one-to-one communications.
iii. Investcorp’s management structure and collective decision-making. Investcorp’s senior management team adopts a collective decision-making style, which is reflected by the committees described below.
The Executive Chairman and the two Co-Chief Executive Officers of Investcorp comprise an Executive Committee which meets frequently to discuss Investcorp’s business and performance on a high level basis.
The members of the Executive Committee, together with the Chief Administrative Officer, the Chief Financial Officer, the senior executives in charge of Investcorp’s investing lines of business (the ‘Investing LOBs’), the Head of PRM, the Head of Risk Management and the General Counsel comprise the Operating Committee. The Operating Committee meets monthly to discuss Investcorp’s business and performance on a more granular level.
Each Investing LOB has an Investment Committee. Each Investment Committee will meet to consider a proposed investment or disposition up to three times in the case of Private Equity and Real Estate.
The Investment Committee for an LOB within Private Equity comprises senior executives within that LOB, a Co-Chief Executive Officer and the head of Risk Management.
The Investment Committee for Real Estate Investments is comprised of senior Real Estate executives, a Co-Chief Executive Officer and the head of Risk Management.
ICM, reflecting its operations in both the US and European markets, operates two regional Investment Committees drawing on the experience of senior investors active in each market. ICM also operates a global committee which combines senior ICM management with experienced investors from both regional committees to oversee those particular ICM managed strategies which operate on a global basis across all ICM investment markets.
The role of each Investment Committee is to evaluate each proposed investment and disposition based on its risk- return profile as well as its overall suitability to Investcorp’s franchise and balance sheet and in the context of Private Equity and Real Estate Investments to determine whether to recommend to the Investment Council that it approve the investment or the disposition. Where a decision is being made in the context of a fund or account managed or advised by an Investcorp subsidiary (e.g. ICM) the suitability of that investment or disposal for the fund concerned, having due regard to the fund’s investment strategy, fund documentation and applicable regulatory principles and regulations, will be evaluated by the relevant ICM investment committee.
Potential investments that are proposed to be placed with Investcorp’s clients in the Gulf are reviewed at an early stage by the Placement Committee, which is comprised of senior PRM executives. The role of the Placement Committee is to assess the attractiveness of a potential investment to Investcorp’s Gulf clients, which is relevant to Investcorp’s underwriting risk.
All investments and dispositions are subject to the final approval of the Investment Council, which is comprised of Bahrain-based senior executives including the Executive Chairman, the Co-Chief Executive Officers, the Chief Financial Officer, the Chief Administrative Officer, and the head of Treasury.
The Financial and Risk Management Committee guides and assists with the overall management of Investcorp’s risk profile on an enterprise-wide basis subject to the approval of the Audit and Risk Committee and the Board of Directors. This Committee also evaluates new hedge fund seeding proposals and potential Special Opportunities Portfolio investments. The Committee is comprised of senior management drawn from key areas of Investcorp and includes the Chief Financial Officer, the head of Treasury and the head of Risk Management.