“It is not necessarily the case that the parties in power will impinge on the rights of others, but perceptions can create the appearance of impropriety.”


also relevant here: the investment manager is the most significant and highest-paid service provider, so the potential for conflicts of interest is greatest in these situations. However, the information and transparency that can be provided by such individuals is considerable. Access to this knowledge is key to the effective governance of the fund, so it is often worth managing the inherent conflicts of interest to obtain this.


In recent discussions with large allocators we have found that


many are in favour of having a representative from the investment manager on the board—partly because they bring transparency and understanding of the fund strategy, and partly because they feel that it enhances the manager’s accountability. A criticism also heard from these allocators is that investment management experience is lacking in the collective expertise of many boards. The presence of a manager representative partially, at least, mitigates these concerns.


One should view investment manager representatives, then, as a


desirable, non-independent component of an effective fund board— provided that such individuals do not represent a majority of the board.


Legal counsel Representatives from legal counsel serving on a fund’s board may


have a conflict of interest, especially if their firm has been selected by, and advises, the investment manager. A number of offshore law firms have created affiliated companies so that a separate team of individuals provides directorship services to their clients, but often the economic reality is the same—with the law firm’s equity partners directly benefiting from the appointment.


If the intent is to appoint an individual from one of these affiliated


firms, the board must be clear on the individual’s level of involvement and loyalties. Specifically, will he conduct his own thorough review of documents or rely upon his colleagues on the other side of the Chinese wall? And will the appointee provide assurances that he will remain a director through troubled times, even if this is not convenient for his legal counterparts? If a firm is conflicted in a distressed situation and forced to choose only one revenue stream, legal fees are generally more lucrative than a director’s stipend.


Investors A concept that has been increasingly discussed of late is the imposition


of an individual on the board to represent the interests of a particular investor, much in the way an activist investor would appoint an individual to the board of listed entities that it invests in (to be clear, this is a different discussion from the investors’ collective rights to appoint or remove directors, as is typically provided for in a fund’s articles of association). This individual would be appointed to the board of several portfolio funds held by the investor, and is accountable to that firm.


While this may be attractive to an investor, it introduces additional considerations for the individual serving as the director. The laws of


64 CAYMAN FUNDS | 2012


several jurisdictions, including the Cayman Islands, do not provide for the concept of proportional representation in corporate governance. Each director owes his fiduciary duties to the fund, being the collective whole, and cannot be seen to unduly favour any one investor. Investor-appointed directors may find themselves standing on both sides of a transaction, and must carefully balance their duties to both parties. Their loyalties may be further tested when actions of another investor are contrary to the interests of their benefactor. A question also arises as to whether such directors will resign when the investor redeems, a practice that could result in relatively high turnover of directors over the life of a fund.


We are very much in favour of institutional investors suggesting independent


directors they are comfortable with when they perceive a fund’s governance to be lacking but, in our opinion, the only time it is appropriate to have one investor appoint a director is on the board of a single-investor fund.


Professional directors A number of individuals serve as director to multiple fund structures,


either as part of a professional services firm dedicated to providing these services, or on their own. These directors should be selected on the basis of individual merit and the support structure that surrounds them. Such individuals are typically independent, unless they are economically dependent on their fees derived from funds under the control of an investment manager, or they are affiliated with a firm that is providing legal, audit, or administration services to the same fund.


When selecting board members it is advisable for a majority to be


professional directors. If there are any non-independent directors involved, their professional colleagues will know how to handle the inherent conflicts and ensure that the proper checks and balances are in place. This is a role that professional independent directors can, and should, play.


As the fund industry matures and becomes increasingly institutionalised,


many investment managers and allocators have come to rely on fiduciary firms that reflect the same sophistication in their own practices to provide independent and experienced individuals to create an effective governance culture.


Your team may win or lose, but with prudent diligence and selection of the officials at least it will be a fair game.


Philip Dickie is a director at fiduciary service provider Harbour. He can be contacted at: pdickie@harbour.ky


Greg Bennett is a director at fiduciary service provider Harbour. He can be contacted at: gbennett@harbour.ky


Philip Dickie is a director of Harbour and serves as an independent director to funds. He has 18 years of international experience in the financial sector, having worked in managerial roles at Deloitte, The Bank of Bermuda, and UBP prior to joining Harbour. He is a CA, CPA and CAIA.


Greg Bennett is a director of Harbour and serves as an independent director to funds. He has more than 15 years’ experience, having held senior positions with PricewaterhouseCoopers, UBS, Butterfield Bank, Butterfield Fulcrum, and HedgeServ prior to joining Harbour. He is a CA, CPA and CFA.


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