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Independent directors: considerations and queries

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By Geoff Ruddick, IMS Fund Services: Independence – Independence is the ‘holy grail’ of 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.

Experience – You will get a good idea of a director’s experience from their ‘bio’, which will appear in the offering document of the fund. Confirm they have experience serving on boards with similar strategies. Although independent directors do not need to be experts, a general understanding of the fundamentals of the underlying strategy is essential.

Qualifications – You will possess academic credentials and qualifications of your own, and expect it of the people you employ. You should require it from an independent director as well. Remember, the directors are ultimately responsible for the oversight of the fund’s affairs. A legal, accounting, compliance, investment or other relevant qualification, combined with experience, will provide a good indication of where their specific expertise lies and how they will add value.

Capacity – Simply put, “capacity = time”. Capacity does not, however, simplistically equate to an arbitrary number or cap, as every relationship will be different and have its own nuances and complexities. Numbers of directorships will provide some insight, but it is only one of the many important things to consider when assessing a director’s capacity. One must keep in mind that numbers, like all statistics, in isolation can be misleading.

It is increasingly becoming recognised that the capacity query should be addressed whereby the focal point is a director’s ‘time’ and the ability to apply his or her mind to issues at hand. Queries now go beyond numbers to determine what a director does day-in and day-out and how they spend their time. They include the composition of the clients the director serves; their role within their company; what other responsibilities they have beyond serving in a personal capacity on fund boards; their model, support infrastructure and their capacity constraints. Other matters to consider include whether the director has any excess capacity for times of stress; and perhaps most importantly determine how they personally view their role as a fiduciary.

Back-up/coverage – Although most consideration should be given to the capabilities of the prospective director, there may be times when the individual may not be available. People take vacations, encounter emergencies, come and go from an organisation or jurisdiction, and start-up businesses often fail.

Confirm that the individual has a sufficient support infrastructure to cover these contingencies, and whether they have colleagues who can be appointed in their place should the need arise. Selecting a director from a director services company carries distinct advantages in such situations.

Furthermore, confirm how long the organisation has been in business, its reputation, whether it is licensed and regulated in relation to the services it provides, carries sufficient insurance, and is appropriately capitalised.

Conclusion – Looking for an independent director does not have to be an arduous, time-consuming process; however, the decision should not be taken lightly. Effective corporate governance is imperative, and some of the issues, scenarios and outright collapses in recent news should highlight this point. As regulators and investors continuously increase their focus on corporate governance, the requirement for the appointment of experienced and qualified independent directors is essential.

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