CAYMAN 2012 - HFMWeek

ADVISORY
are unacceptable to them to perform
their role. Other directors may accept
more limitations, but they make sure
the manager understands this means
they will have a reduced responsibility
in terms of oversight.
The way to overcome limitations is
for the directors to get a really good
handle on what the delegation documents
say at the start, and put their
hands up when they see something
they don’t like.
The better directors are certainly getting
to the point where they are refusing
to allow some of these limitations
to be placed on them at launch, they’re
insisting on their checklist of oversights
and things they want to be able to deal
with, or they’re just not willing to come
onboard.
you a degree of oversight, an alternative view to that of the
investment manager and perhaps some insight into the industry,
and these are all benefits.
Many managers really only have exposure to the hedge
fund industry, and hedge funds generally, through a couple
of their own funds. There are obviously some larger managers
for whom that’s not true, but many of them don’t.
Obviously, professional independent directors have exposure
to a lot more of it, so they’re usually better placed to
advise on who knows what they’re doing and who doesn’t,
but also on what the industry norms are.
Managers often don’t know what the norm is and something
that a manager is doing that a fund wouldn’t necessarily
want to happen should be noticed quicker by an independent
director.
HFM: What limits are there on the role of an independent
director and how can these shortfalls be overcome
ID: You could say there really are no limitations. The director
is, according to standard basic company law, responsible
for the running of the company, so there shouldn’t be
any limits on what they can do other than what is set out
in the law and in the standard constitutional documents
of the company, but of course that’s not true because they
tend to delegate a lot of functions. What happens in reality
is the limitations are set by the manager at the start.
Some directors will come in at the beginning and inform
the manager that limitations such as not having access
to detailed management accounts or certain people
HFM: How powerful are independent
directors in reality given that
investment managers have the power
to vote for their removal
ID: Obviously, the directors can ultimately
end up powerless because they
can be removed. I have even seen more
recently, although it’s still very uncommon,
cases where the ability to remove
the directors remains with the investors,
but it’s still quite uncommon and I’ve
only seen it in circumstances where a seed investor has demanded
it from the start.
Of course, if a manager decides to take that nuclear option
and remove a director, a lot of questions will be asked.
The likelihood is that the director would have been going
through a process of talking to service providers, and
probably investors, expressing some dissatisfaction with
what the manager has been doing. So to some degree, by
the time you get to that point, the cat’s probably out of the
bag already and a lot of the service providers are aware
there’s something funny going on. Therefore, independent
directors still retain a lot of power, even if it’s only by reputation,
because of the noise they are able to make.
In past years there may have been a concern that professional
independent directors were afraid to rock the boat
because it was their livelihood, and if they kept doing that
they’d find nobody wants to work with them.
In fact, as directors have been entering the mainstream
more and more, I think the opposite has been the case. Directors
who have jumped up and down and made noise
about particular issues or the behaviour of certain managers
find themselves very attractive to other funds who feel
these directors protect investors’ interests. This is what
gives them some power.
It would probably be better if there wasn’t this appearance
that they can just be removed at will, but the reality
of the situation is that the ability to remove them is such a
drastic option for a manger to take, looks so bad from an investor’s
perspective and would require such degree of explanation,
that very few managers will actually jump to that. n
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