CAYMAN 2012 - HFMWeek

CAYMAN 2012
CORPORATE GOVERNANCE
INDEPENDENT DIRECTORS:
THE INVESTORS’ WATCHDOG
LARGELY IGNORED OR AT WORST REGARDED AS AN UNNECESSARY NUISANCE FOR MANY YEARS, INDEPENDENT DIRECTORS ARE NOW GAINING
MORE RECOGNITION BY ALL IN THE FUND INDUSTRY. PAUL HARRIS OF IMS EXPLAINS WHY THEY ARE KEY TO KEEPING EVERYTHING ON TRACK
Paul Harris
F.C.A., T.E.P. is chairman and
founder of International
Management Services Ltd
(established 1974). Harris is
the founder member of the
Cayman Islands Society of
Professional Accountants;
former secretary to the
Chamber of Commerce;
president of the Cayman
Islands Company Managers
Association; and president
of the Cayman Islands
Directors Association.
Not the least of those now recognising independent
directors’ importance are the
investors themselves and to such an extent
that it is now common practice for institutional
investors to carry out extensive due
diligence on the directors as well as the investment
manager. Indeed there is a burgeoning industry
of professional due diligence firms hiring themselves out
for a fee to do due diligence on the directors on behalf of
the shareholders.
Why all of a sudden all this attention Possibly because,
post-Madoff, investors realise they
may never be able to rely on regulators
to safeguard their interests.
After all, Bernard Madoff managed
to defraud investors of more than
$50bn in one of the most regulated
financial markets in the world.
Or maybe it was because supposed
bastions of the economy
totally ignored signs of the impending
financial crisis with
the Organisation for Economic
Co-operation and Development
(OECD) stating that “the current
economic situation is in many ways
better than what we have experienced
in years” only three months
before the financial crisis began
and the US stock market started its
long decline, with financial institutions
resembling tenpins rather
than the pillars of society they had
once been.
As always, new legislation is being instituted to “prevent
such things from ever happening again”, but this, as before,
is all done with hindsight after the horse has bolted. A lesson
to be drawn from the Madoff affair is that there was no
corporate governance whatsoever. There were no checks
and balances, no internal controls, no independence and,
probably most significantly, great apathy on the part of the
investors themselves with no one being appointed to look
after their interests. It would have only taken a few sensible
questions to avoid the great pit that everyone fell into.
IF NOT THE REGULATOR – THEN WHO
Enter the independent director. Given enough freedom
GIVEN ENOUGH FREEDOM,
THE INDEPENDENT
DIRECTOR SHOULD BE
ABLE TO SAFEGUARD NOT
ONLY THE INVESTORS BUT
ALSO ACT AS A STEADYING
INFLUENCE ON THE
INVESTMENT MANAGERS
”
of access and sufficient remuneration to do a good job,
the independent director should be able to safeguard not
only the investors but also act as a steadying influence on
the investment managers, lay down proper guidelines for
administrators and see that “true and fair view” financial
statements are presented to the auditors for audit and final
presentation to the shareholders.
Shareholders are busy and often do not have time to
monitor all the activities of a company themselves, but
by appointing directors they effectively delegate the dayto-day
running of the company to those directors, who in
turn appoint and supervise management.
In the case of a hedge
fund, there are often no executive
directors or even staff. Instead, the
independent directors appoint other
professional service providers to
provide all the services the fund
requires. Typically these service
providers are the investment manager
to invest the funds, the fund
administrator to act as registrar and
transfer agent and to calculate the
NAV, the auditor to give an opinion
on whether the accounts presented
by the directors show a true and
fair view, and the attorney to draft
the documents associated with an
offering and to give legal opinions
on the actions of the fund – where
expert advice is required due to the
legal ramifications of certain transactions.
In addition, prime brokers
and custodians are often appointed.
Very often these service providers will have been recommended
by the investment manager, who is usually the
promoter of the fund. However the independent director
will not appoint a service provider they are not comfortable
with and will ensure that service providers to the fund
are independent of each other so that acceptable checks
and balances are achieved.
Much has been written about what to look for when appointing
an independent director. Luckily it is not rocket
science. In a nutshell, the independent director should be
qualified and experienced in the fund industry with sufficient
years of proven track record in similar roles and with
sufficient resources to be able to provide systems to moni-
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