Behind the Boardroom: A View From An Independent Fund Director
- Monica Volpin
- Oct 9
- 5 min read
Partner at Larkstoke Advisors | Tax Advisory | Asset Managers
In the current world having the right independent fund director is a strategic asset. For fund managers an independent director brings credibility, governance, discipline and demonstrates to investors that the fund is managed with transparency and integrity. Hence it is important to choose the right director for your fund.
We have sat down with Richard Scott-Hopkins , the founder of Daymer Group to ask him what fund managers should know — and expect — when working with an independent fund director. Richard is a Chartered Accountant and an Accredited Director who provides independent director and consulting services to the financial services sector. He has over 25 years of experience in governance, auditing, advising, and overseeing investment managers, hedge and private funds, and structured products.
What are the top three questions that a fund manager should ask a prospective fund director?
1. Experience – What relevant experience does the director bring to the table, not just as a director but in their prior roles? It’s important that the Board of Directors has a blend of experience that covers legal, regulatory, accounting, risk and valuation. A further question in this regard is whether the proposed director has dealt with complex or extraordinary issues in the past and if they have the skill set to lead an entity in difficult times.
2. Capacity – Does the director have capacity, not just for the day-to-day activities of the fund, but for when times get tough and they need to roll up their sleeves and help out? Clients should ask how many relationships and entities the director has, and the time required for each of these relationships and hence what capacity they have left. Clients should ask how the director determines how many relationships they can take on. At Daymer we limit our relationships to no more than thirty and reduce this if one of these relationships has multiple entities and/or increased complexity.
3. Independence – Is the director able to make independent decisions in the best interest of the fund? Directors should be able to demonstrate that they are free from all conflicts-of-interest with the fund and that they can make difficult decisions when required.
What about remuneration, how should fund managers think about compensating independent directors?
Directors take on personal liability and hence renumeration should be consummate on the size, complexity and level of risk inherent in the fund. Remuneration should be structured to avoid any perception of bias or conflict. A flat annual fee paid annually or quarterly in advance is common, with additional fees being charged for any work performed over and above that expected for normal day to day operations, such as dealing with any litigation. This is usually on an hourly basis and agreed in advance. Ultimately, the goal is fair, transparent, and arm’s-length remuneration that reflects the responsibility and risk of the role.
What are the core responsibilities of an independent fund director?
Fiduciary duty to act in the best interest of the fund and avoid any conflicts of interest;
Actively participate in regular board meetings and ensure compliance with Cayman Islands Monetary Authority governance requirements;
Provide oversight of all service providers and ensuring that they are performing in line with their service agreements and industry standards;
Understand and monitor risk management including liquidity, leverage and valuation risk;
Keep up to date with international and local regulations as well as any changes to accounting standards and ensure the fund is in compliance with these requirements especially AML, KYC and sanctions;
Manage any conflicts, related party transactions, side pockets and ensure any investor requests are in the best interests of the fund.
Be ready for any crisis and to manage any disputes. This may involve making key decisions in times of distress, such as implementing suspensions, making valuation adjustments, engagement with regulators, liquidators and legal counsel as well as potentially removal of service providers;
Ensure timely and transparent reporting to investors, maintain open lines of communication with the investment manager, providers and regulators.
What fund managers should expect from their independent fund director?
Fund managers should expect their directors to be in regular contact, providing timely and considered advice, not just waiting for board meetings to rubber stamp decisions made during that period. Directors need to understand the risks that the fund is facing in real time from an investment, market or regulatory perspective, they should be able to understand the requirements of the funds stakeholders and hold management to account. I believe to get the best out of your directors you need to treat them as part of the team; there should be no surprises.
We have seen extraordinary stock market volatility in the past year coupled with ongoing geopolitical crises, how do you support fund managers in such uncertain times?
It is important that the fund’s directors understand markets and the related consequences for their fund clients and help management plan for uncertain times. At times of uncertainty this is where diverse boards with relevant experience become invaluable. Having directors that know what to do and who to turn to during volatile times enables funds to navigate through these uncertain times. It is not just about making gating decisions, NAV suspensions and creating side pockets, it is about thinking what are the long-term implications of these decisions and how to plan for them. But even in calm markets, it is important for directors to have an oversight on valuations, service providers, and regulatory compliance to help prevent problems before they start.
What are the common mistakes that you see from fund managers in engaging with directors?
The board of directors should be a strategic partner - Directors are not there to rubber stamp decisions of management. They need time to consider the right outcome for all stakeholders and be able to challenge management on key decisions.
Neglecting investor expectations - Ignoring the fact that sophisticated allocators perform operational due diligence on directors. Weak governance is increasingly a reason to decline an allocation.
Do not overlook the experience of your board of directors - You may find that your directors are dealing with (or have dealt with) similar issues with other clients. This may lead to significant time and cost savings.
Overvaluing “brand name credentials” without interviewing the director to ensure they have relevant experience.
Failing to assess capacity - Appointing a director with too many board seats.
Do not just make decisions on who should be your directors based on cost. Make sure you get the right board for your circumstances and then negotiate.
Final thoughts
The practice of effective governance and independent oversight is evolving. There are many items to consider when implementing effective and good governance and these are eloquently summed up by the CFA Institute’s guide to Investment Management Governance: “A good fund board is characterized by independence, transparency and a focus on the primacy of client interests. A well-managed board will ensure the appropriate organizational structure and supervision to prevent any conflicts of interest.” It adds “A fund board should be composed of at least a majority of independent board members acting independently from the management of the fund. An independent board is necessary to protect the interests of investors and mitigate any conflicts of interest that may arise between investment managers and fund investors in the operations of the fund. Board independence helps uphold the primacy of client interest over those of the investment manager.”
A well-chosen independent director can enhance the fund’s governance, strengthen investor trust, and support the long-term resilience of the fund and can provide strategic timely advice in times of uncertainty.
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