Geoff Ruddick, International Management Services Ltd.
One of the first considerations when looking for an independent director is the underlying reason behind your search. Probably, given the spectacular hedge fund and corporate collapses in recent years, part of the reason is the desire for effective corporate governance. Or perhaps the driving factor is to assist with the tax planning of the investment manager or to secure the fund’s offshore tax status by ensuring that the jurisdiction in which the mind, management and control of the company is exercised, is clearly offshore. Regardless of the reason, a qualified, experienced, independent director will assist in meeting the underlying requirements. The question remains, however: how do you go about the selection process and determine who is the right person for the job?
So, where do you start?
Your legal counsel and administrator are a good starting point, and will have a shortlist of those individuals they recommend. Once you have their recommendations, you should make additional enquiries to find the individual who is right for the fund. Investigate your options and don’t limit your search to the first name on the list. Keep in mind that independent directors come with varying backgrounds, experience, qualifications, styles, interpersonal skills and corporate support — check around to compare and contrast. You will have some questions for the prospective director, and should expect that they will have some for you in return.
Now, what should you be asking?
There are obviously no hard and fast rules or an all encompassing list of questions you should ask; however, a suggested ‘top 10’ for consideration follows. Add or subtract as you will; the list is by no means all-inclusive, but it will hopefully point you in the right direction:
Is the prospective director independent of the investment manager, administrator, and other service providers?
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.
Does the individual have relevant industry experience and experience with the fund’s strategy specifically?
You will get a good idea of their experience from their biography, which will eventually appear in the offering document of your fund. You will also want to ask if they have sat on boards with similar strategies. Independent directors do not need to be experts; however, a general understanding of the fundamentals of the underlying strategy is essential.
Does the individual have relevant professional 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.
How many boards does the director currently sit on and how many manager relationships do they service?
Everyone wants to know the magic number. Unfortunately, there is no definitive number as every relationship will be different and have its own nuances and complexities. If you receive a vague response or, worse yet, they just don’t know the answer, it will be an indication of the level of responsiveness you can expect to receive from them. Directors should know exactly how many relationships and corresponding fund boards they serve on at any given time. You need to be able to assess if they will be able to devote enough time to fulfil their duties.