Independent Directors – Do They Bring Value?
[Written by Laura Knox Clingerman]
As regulatory reporting and disclosure obligations increase, the last suggestion investment fund industry participants may want to hear is “Why not add an independent director to your board?”.
Independent directors can be perceived to slow progress when board resolutions are needed quickly in the ordinary business of an investment fund, and adding another director to a board comes with tangible increased costs of directors’ fees.
Notwithstanding these perceived deterrents, there are many compelling reasons to add an independent director to the board of an investment fund, including:
- 1. An independent director’s first duty is to the fund. He or she is able to ask tough questions to ensure that the investment manager is keeping the investors’ interests in the forefront. A recent working paper, “Powerful Independent Directors” [c] Kathy Fogel, Suffolk University, Liping Ma, University of Texas at Dallas, and Randall Morck, University of Alberta, concluded that “Shareholder valuations are economically and statistically positively correlated with independent directors’ power…..We suggest that more powerful independent directors constitute a more informed and credible alternative voice of dissent against a wayward CEO, and can thus more reliably interrupt “groupthink” in the full board or relevant board committee.”
- 2. An independent director can take steps to ensure that board meetings are held regularly and all necessary parties are included. Inviting all directors, the investment manager, FATCA Responsible Officer, administrator, and legal counsel to be part of the same conversation is invaluable in ensuring there is transparency amongst the service providers and that all issues are raised and are appropriately addressed. These meetings establish communication channels which benefit all stakeholders.
- 3. An independent director who is well-versed in FATCA, Common Reporting Standards, and other regulatory obligations can save a fund money and time by sharing his or her expertise as to what procedures, information, or new services providers will require to comply with legal and regulatory requirements.
- 4. An independent director who has experience guiding funds through challenging events such as illiquid portfolios, significant or unexpected redemption requests, or reaching shareholder consensus on major issues can utilise these experiences in steering a fund in the most favourable direction.
- 5. An independent director is looked upon favourably by third party investors, essential in a manager’s search for capital. Potential investors want to be confident of an objective viewpoint if, for example, principal or agency trades are permitted.
- 6. An independent director adds a level of oversight which is positively considered by auditors throughout the audit process and by regulatory bodies.
- 7. An independent director with professional qualifications and experience can further complement the capabilities of a fund management team. For instance, a foreign lawyer with an independent board seat can offer a greater depth of insight in situations of jurisdictional reporting and an independent director with a strong accounting background can add additional value when complex financial issues, such as restatements, are encountered.
Many investment fund board members may strive to approach issues with the intent to improve stakeholder outcomes. Having a director truly independent in both fact and in appearance adds value which is indispensable in an investment fund’s pursuit for healthy growth.
Laura Knox Clingerman is Head of Director Services at Harbour Financial Services Limited and can be contacted at 31 Victoria Street, Hamilton. Tel 441.494.4088 Email lknox@wq.bm Web www.wq.bm. Harbour Financial Services Limited, an affiliate of Wakefield Quin Limited, is licensed and regulated as a fund administrator by the Bermuda Monetary Authority under the Investment Funds Act 2006.
