Raising the bar for boards

The quality and depth of experience among directors separates the Cayman Islands from other fund domiciles, and that’s what counts, says Ronan Guilfoyle of Calderwood.

Events in the investment fund industry since the financial crisis have generated significant debate about what constitutes good governance. As it is the leading jurisdiction for hedge funds, it is no great surprise that the Cayman Islands has been central to this discussion.

Unfortunately, the media may be more interested in a sensationalist story when something blows up, but the plain—and perhaps quite boring—truth of the matter is that such situations are exceedingly rare and if you focus on the jurisdiction as the cause, you could be missing the point and perpetuating problems in the industry that far exceed the boundaries of jurisdiction—be it Cayman or anywhere else.

The basic truth is that a jurisdiction is not going to make the difference between a fund coming through a crisis unscathed. It’s not about onshore vs offshore. It’s about having independent directors with the right skillsets in the right areas to protect investors. Particularly in the current climate of heightened concerns over governance, investors need to be asking themselves ‘how experienced are my directors and do they have the kind of background and proof of experience for carrying out their fiduciary duty in the right way that is going to make the difference should a fund unfortunately find itself in difficulty?’

Quality counts

It is fair to say that no other fund domicile can quite match the collective experience and expertise of directors in the Cayman Islands. It is this quality that investment managers and investors should really focus on, not the jurisdiction, however tempting a clickable headline is that plays to past preconceptions about Cayman boards spending more time at the beach.

These individuals have the ability to ask the right questions, anticipate problems and take appropriate action, and are quietly adding value to the boards they sit on, as well as protecting the value of investments, without generating headlines.

The vast majority of directors are fully engaged and properly discharging their fiduciary duties, day in, day out—and the key benefit for investors is that their funds domiciled in Cayman are represented by some of the most experienced, well qualified and diligent directors in the business.

In many cases, investors become most exposed during periods of distress for investment funds, being either held unnecessarily in lockups or having to undergo a major haircut to get any sort of liquidity. Equally, there have been numerous instances when Cayman directors have been highly influential in resolving distressed situations.

Many of the established directors in Cayman, a mature fund jurisdiction, have direct experience of workouts and dealing with distressed matters, with the whole industry benefiting from their experience. Even if the directors were not acting in a fiduciary role during the aftermath of the financial crisis, in many cases they were involved elsewhere in the sector, be it the legal or auditing profession or with one of the major fund administrators.

"The best directors are the ones who are interacting with their peer group, and contributing to the development of regulation in their jurisdiction."

One of the key differentiating factors when it comes to what attracts investment managers and institutional investors to the Cayman Islands is the high level of talent across the industry. Nowhere else will you find such a concentration of experienced professionals focused on the investment funds industry. This extends well beyond the Cayman Islands-based directors, most of whom spent at least part of their careers working for the various global audit firms, administrators or law firms based in Cayman.

These firms are all vying to be the provider of choice in their field, leading the discussion on issues within the funds industry and ensuring that the Cayman Islands remains a centre of excellence for investment funds. It is this community effort that sets the Cayman Islands apart from most of its competitors and defines Cayman as the jurisdiction of choice.

Beyond jurisdiction

After investment managers have assessed the experience for the independent directors they are considering, they should also look at what the directors are doing to increase their knowledge and stay up to date with current trends, so that they can consistently bring added value to the boardroom. The best directors are the ones who are interacting with their peer group, and contributing to the development of regulation in their jurisdiction, with the experience to help shape regulatory developments to the benefit of investors.

Highlighting the outstanding level of professionalism in the sector, the Cayman Islands Directors Association (CIDA) has a strong focus on investment funds, with hundreds of members who meet regularly to discuss industry developments, regulatory matters and the evolution of best practices in general, as well as liaising directly with the regulator on behalf of the industry.

CIDA’s strong relationship with the government and local regulator has played an important part in the raising of local standards. It was also able to provide input to the Cayman Islands Monetary Authority’s Statement of Guidance for directors, which sets out the minimum standards expected and has helped to educate the industry and spread best practice.

Regular conferences and seminars on important industry issues play a key role in taking advantage of this deep knowledge base, providing Cayman-based directors with high level and practical solutions, again to the benefit of investors, in particular the ability to add value to a board when—and before—problems occur.

With the speed of development in the financial industry, there may be cases where directors have to venture into uncharted waters and areas in which they may be unfamiliar, however much experience they have. This brings the relationship down to a matter of trust and being able to rely on a director’s instincts and experience to do what is right for the fund. The Cayman fund sector is blessed with many directors with deep funds-related experience in an industry which consistently looks to raise standards as it develops.

Let’s focus on elevating the conversation and raising the bar beyond jurisdiction to be sure that when we appoint directors they have the proven depth of experience to fulfil their responsibilities, that they work to keep their knowledge current and relevant by integrating with professional organisations and other industry opportunities, and that whoever gets appointed, from any jurisdiction, be sure it’s truly someone that you trust to direct the fund through the prosperous and challenging times.

Ronan Guilfoyle is a co-founder at Calderwood. He can be contacted at: rguilfoyle@calderwood.ky