Directors handy in a crisis

Cayman Islands: Facing a challenging future with confidence

street-in-cayman

Paul Harris was the first chartered accountant to take up residence in the Cayman Islands, opening an accounting office in 1967. This eventually became the Cayman firm of Ernst & Young.

Harris, not one to rest on his laurels, is now the chairman and founder of International Management Services (IMS), one of the first providers of corporate services in the Cayman Islands. He is also the president and driving force behind the Cayman Islands Directors Association (CIDA).

IMS has provided directors to Cayman companies for more than 30 years. Because hedge funds are a major part of the Cayman Islands financial industry, IMS has geared its services in that direction over the past 10 years. IMS Director Services is a division of IMS, providing corporate governance to hedge funds. All directors provided by IMS Director Services are qualified and experienced in the mutual fund area and have been drawn from some of the best-known companies in the industry.

IMS holds licences as a company manager, an insurance manager, a trust and a fund administrator.

As a company regulated by the Cayman Islands Monetary Authority (CIMA), IMS is subject to on-site inspections by the regulator.

In addition to his duties at IMS and with CIDA, Harris sits on the Cayman Islands anti-money laundering guidance notes committee as a representative of the Cayman Islands Company Managers Association.

“I started CIDA for local reasons,” says Harris. “The Cayman Islands is a substantial financial centre. So it is not so unusual to also have directorships from the islands.”

Harris sees CIDA’s main goal as maintaining professional standards. He is careful in his choice of words. For him, standards are already high. He is passionate about the role directors play in organisations and believes Cayman is uniquely placed to provide expert directors, particularly for the hedge fund sector. The main goal and thrust of CIDA, he says, is to keep local standards high, equal to any other international financial centre, such as the UK.

CIMA is looking at the role of directors and considering whether the sector needs to be regulated. Although nothing has been made public, some of the ideas under consideration could include a register of directors and the companies on which they sit as directors. It is unlikely the Cayman Islands Monetary Authority (CIMA) would opt for a mandatory requirement for funds to have a Cayman Islands-based director.

 Harris prefers self-regulation, although he sees some merit in the idea of a registry of directorships.

He sees the role of directors quite simply as looking after shareholders and protecting their interests.

Business models
The IMS business model takes a top-down approach. About 10 people act as directors. When they have tasks to handle in their role as directors, the information is first seen by a director and then could be passed to support staff. For example, a qualified accountant could review figures or an audited statement, while a lawyer or paralegal answers any legal questions.

He believes the main criteria for the number of directorships one person holds should be limited only by the limits of time needed to safeguard the interests of investors and fulfil any fiduciary responsibilities. Depending on how funds are structured, one person could conceivably be the director for a number of funds, if there were feeder funds involved.

Harris says IMS’s model works well. He is keen to promote the sector, believing that people from fund administration and accountancy backgrounds in particular are well suited to the industry

At DMS Management a completely different business model is followed. As director Roger Hanson explains, directors at the company are backed up by a number of support staff. There are seven directors, five managers and below that around 20 corporate administrators, paralegals and others helping the directors fulfil their duties.

“With our model, something comes in from the client to deal with. This will go to administration to sort out, package, provide a summary, whatever needs to be done. Then it is presented to the director to review and complete,” explains Hanson. This, he believes, gives directors more time to spend on in-depth review with all the necessary information. Directors are given all the information they need to make decisions, but also the time they need to deliberate.

Hanson and founder of DMS, Don Seymour (whose middle name begins with ‘M’, hence DMS), set up the business to provide independent directors specifically for hedge funds.

Both Hanson and Seymour believe it is in the economic interest of Cayman to have a thriving independent directors business. They, like Harris, believe the wealth and depth of talent available on the island is impressive and will place the jurisdiction in the forefront of this industry.

Promotion time
The timing for promoting the industry’s role could not be better. The problems many funds experienced in 2008 with high redemptions, illiquid assets and the need to impose gates, among other measures to manage liquidity, brought independent directors into the spotlight. During a crisis, having an independent director on a hedge fund board was seen as a major plus. Directors of funds in crisis or distress often need to make tough decisions, and should primarily be looking after the interests of the fund and its shareholders, rather than the manager, and those that are closely tied to the manager (or who are actually the fund manager) may find it difficult to remain objective.

Hanson is convinced that behind-the-scenes activity by independent directors is one of the reasons there has been little litigation by disgruntled investors. He also believes independent directors will be de rigueur in future, as investors will want to see independence at board level.

Carne Global Financial Services  is probably the newest directorship business to open in Cayman. Although the company started only in 2004, in Dublin, it has already expanded, setting up in Geneva, Dubai and now Cayman.

Like IMS and DMS, it draws on a talent pool made up primarily of former fund administrators and accountants. Carne’s Peter Heaps believes directorships are attractive second careers for senior people leaving these professions. He agrees they have an important and increasingly demanding role to play, particularly as hedge funds are moving into an uncertain environment as regards regulation as well as structure.

Heaps believes investors will, as part of their due diligence on a hedge fund, look for robust structures at all levels, including the board. Already, background checks on experience and knowledge are being undertaken by some investors. There are also reports that investors are requiring new funds to have boards that are majority or fully independent.

Another independent director business operating from Cayman is DirectorsPlus, with Gary Linford as managing director. Linford had a stint at CIMA before his position at the regulator was filled by the now head of the investments and securities division, Yolanda McCoy.

He believes his experience both in the public and private sectors gives him a unique insight into the problems inherent in the relationship between regulator and regulated.

His expertise also makes him a much sought-after director for hedge funds. Since starting the business in January 2007, DirectorsPlus has attracted six or seven “great clients” and Linford is on the board of several funds, with billions of dollars worth of assets under management.

He, too, believes the industry has a lot to offer hedge funds and that Cayman is an excellent place to be based. Although the hedge fund industry is global, he believes Cayman offers the largest talent pool from which to choose independent directors and a variety of models for operating as a director.

Whatever the future might hold for Cayman, it is clear the role of independent director will become ever more important. As more funds move towards totally independent boards, it is likely that the jurisdiction’s role will be substantial in this service sector.

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