The practice of effective governance and independent oversight is evolving. There are many items to consider when implementing effective/good governance and these are eloquently summed up by the CFA Institute’s guide to Investment Management Governance. “A good fund board is characterised by independence, transparency and a focus on the primacy of client interests. The well-managed board will ensure the appropriate organisational structure and supervision to prevent any conflicts of interest.” It adds “a fund board should be composed of at least a majority of independent board members acting independently from the management of the fund. An independent board is necessary to protect the interests of investors and mitigate any conflicts of interest that may arise between investment managers and fund investors in the operations of the fund. Board independence helps uphold the primacy of client interest over those of the investment manager.”
Independent directors should be able to demonstrate that they are free from all conflicts with the fund, the investment manager, administrator, legal firm, and other key service providers where relevant.
With the focus of regulators and investors on governance ever increasing, and new guidance and requirements being released recently, it is important that founders consider the qualifications, experience, independence and capacity of each director that is to be appointed to the board of the fund. The most effective boards will have members with complimentary skill sets. In addition, diversity has become important for many investors, so consideration should be given to the board composition.
It has become standard practice to have at least two independent directors combined with a member of the investment management team be appointed to the board, with further directors being added where there is added complexity and risk while still ensuring an independent majority.
Investors expect there to be representation of the investment manager on the board of the fund. This ensures that the investment manager has responsibility and liability at the fund level. Investors also expect all board members to be active members of the board, including attending all board meetings.
It is best practice is for board meetings to be held quarterly, one of which should ideally be held in person by the directors (although the frequency of in-person meetings should be considered against the costs with respect to fund size and complexity). The board meetings should include all key service providers providing an update to the board on their activities including any risks to the fund either past or present.
Items to Consider Prior to Appointing an Independent Director:
- Is the proposed independent director affiliated with any of the key service providers of the fund. Could the affiliation be considered a conflict?
- Does the proposed independent director have the relevant experience required to add value?
- Has the proposed independent director dealt with complex or extraordinary issues in the past, do they have the skill set to lead a fund in times of trouble?
- Does the proposed independent director have the capacity to take on the appointment? How many relationships/funds do they have?
- How does the experience of the proposed independent director sit with other board members, and do they provide a complementary skill set?
- Will the proposed appointment align with the diversity requirements of the investors?
Authors:
Richard Scott-Hopkins, Cayman-based Independent Fund Director
Kim Bishop, Cayman-based Independent Fund Director