The directors we provide are well aware of their fiduciary duties to the companies for which they act as directors. At their most basic, they must:
(i) act bona fide in what they consider to be the best interests of the company;
(ii) exercise their powers for the purposes for which they are conferred;
(iii) not place themselves in a position where there is a conflict between their personal interests and their duty to the company; and
(iv) exercise reasonable care, skill and diligence that would be expected of a reasonably diligent person having the general knowledge, skill and experience reasonably to be expected of a person acting as an independent non-executive director (which is based upon the knowledge, skill and experience which the director actually possesses).
The directors of a fund are collectively responsible for promoting the success of the fund by leading and directing the fund’s affairs. Effective corporate governance is imperative in today’s environment as regulators continue to increase their scrutiny and investors are increasingly demanding it. Additionally, other key considerations include potential favorable impact on the tax planning of the investment manager and securing the offshore tax status of the fund through the management and control being exercised in an offshore jurisdiction.
As long as the fund is investing in accordance with the investment strategies and restrictions disclosed in its offering document, the role of an independent director is generally limited to a high-level supervisory role reviewing the performance of the fund and its service providers (including the investment manager), reviewing and executing agreements, attending directors meetings and dealing with any extraordinary issues such as side letters and resolving conflicts.
Independent directors add value by being free of any relationships with the investment manager, administrators and other service providers; their representation on boards is seen positively by investors and regulatory and tax authorities; they increase both investor and service provider confidence; and they possess knowledge and experience of the jurisdictional requirements where the fund is established.
Q. What should I consider when selecting an independent director?
A. Independence, capacity constraints, insurance coverage, regulatory approval, corporate support, qualifications, and experience are some of the key factors to consider when selecting an independent director. Directors are individuals who come with different backgrounds, styles, interpersonal skills, and many of the other aforementioned attributes. The objective is to find a competent individual with a commercial mindset who will be responsive to the affairs of the fund.
Q. Why is independence important?
A. Independence is critical to effective corporate governance. If a director is not independent, conflicts of interest will inevitably arise and interfere with the director’s ability to act in the best interests of the fund. Ensuring that the prospective director is independent of the investment manager, administrator and other service providers is critical.
Q. What is meant by capacity constraints?
A. The directors oversee the affairs of the fund and time and effort is required to effectively fulfill their duties. If they sit on an excessive number of boards or have too many manager relationships they will be unable to adequately serve the fund.
Q. What about insurance coverage?
A. Given today’s increasingly litigious environment insurance coverage is becoming ever more important. A sufficient level of insurance coverage will provide an indication of the financial standing of the individual and organization. It will also give some assurance that they have an understanding of the litigation risks in today’s environment.
Q. How much will an independent director charge?
A. The directors are responsible for the oversight of the fund’s affairs. As such, they have personal liability and the penalties associated with a failure in fulfilling their duties will far exceed the fees they will receive. The remuneration of a director should be sufficient to attract and fairly compensate high quality individuals.
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