Independent directors in the Cayman Islands: Benefits and considerations
An independent director is a member of a board of directors who has no other links with the company other than sitting on the board. They have no material or pecuniary relationship with the company or related persons. They are neither part of its executive team now involved in the day-to-day operations of the company. So why would you consider having an independent director on your board?
The Cayman Islands have been subject to several high-profile fund failures and fraud investigations in recent years. It's important that funds take measures to prevent this from happening in the future. One effective way is to appoint an independent director on the board of an offshore fund.
Already, this is becoming something of an industry standard. Today, investors are becoming more sophisticated, and so are their investment requirements. Having members of the board who are independent from the investment manager and promotor has many benefits. For example, more emphasis is put on the experience and skill set of these independent directors. This helps ensure that investor interests remain a priority at all times. It also helps the fund adhere to all local rules and regulations. Independent directors also act as a deterrent to mismanagement, fraud and gaps in governance.
An independent director acts independently of management. They are free from any business-related constraints or relationships which could interfere with their ability to act in a company’s best interests. They assist in monitoring and guiding the board in management. They can also act as a watchdog, ensuring good governance and enhancing a company’s image. Whether the director is independent or not, they all have the same duty - to protect the interests of a company, its shareholders and its employees.
An independent director’s role includes improving and maintaining the quality of governance of a company. They also ensure that all parties act in the interest of the company, and not its owners. They owe a fiduciary duty to the company they act for, and must:
- Always act in good faith of the company or fund
- Use all knowledge, skill and care when acting on behalf of the company or fund
- Comply with statutory obligations which relate to the management and operations of the company or fund.
As already highlighted above, there are multiple benefits to having an independent director on a company’s board. An independent director can act to guide the company though the complex regulatory landscape. They can also bring a fresh perspective on how a company should run. They can bring a wealth of experience and skills which complements the rest of the board.
Other advantages include:
- Enhancing a fund offering and providing comfort to investors
- Increased due diligence by investors who focus on those tasked with governance
- Assisting with raising capital
- Bringing experience of acting on other fund boards to provide insights on market developments.
In practice, independent directors keep a close eye on a fund's performance – particularly in line with the offering document or partnership agreement.
Other areas which an independent director should keep a close eye on include:
- Regulatory deadlines, such as annual registration fees
- FATCA and CRS deadlines
- Economic substance notifications
- Beneficial ownership data management and reporting
- Submission of financial statements
- Any other deadlines that may incur penalties if missed.
This last point is particularly important. In some cases, maximum penalties and fines can reach as high as US$1.2 million for serious breaches.
Choosing the right independent director for your fund should entail the same due diligence process as choosing other service providers.
An independent director does not need to be a resident of the Cayman Islands. However, besides the benefits as outlined above, onshore counsel may recommend having mind and management in situ in the Cayman Islands, especially given the increasing international focus on economic substance and transparency. A resident independent director can support international tax planning, or meet certain foreign (economic substance) requirements, as well as benefit from tax advantages.
The four-eyes principle is a process where two individuals approve an action before it's carried out. The four-eyes principle ensures no oversight, and that all checks and balances are completed. In case of decision making or signing of transaction documents, it is important that at least two persons are part of this process. A minimum of two directors are required for applicants that are companies. In the case of a general partnership or corporate director of a private fund, the Cayman Islands Monetary Authority (CIMA) will require a minimum of two natural persons to be named in respect of a general partner or corporate director of a private fund.
A director of a private fund in the Cayman Islands is not required to be registered with the local authorities. However, a hedge fund director should be registered with CIMA under the Directors Registration and Licensing Act, 2014 (as amended) and pay an annual fee.
TMF Group’s directorship and officer services can provide you with seasoned business professionals with the seniority, qualifications and experience to perform their duties calmly and expertly, even in times of crisis. Our directors come from varied backgrounds and are well versed in local regulatory requirements.
We can help provide you with more than just an independent director in the Cayman Islands: our directors cover 120 offices worldwide. They can provide a wealth of knowledge and experience that can help your business navigate and expand into different markets. They can also ensure you remain informed with the latest news and trends around the globe.
Contact our experts today to find out how we can help your Cayman Islands business.