This is the second part of a speech given by former Cayman Islands Monetary Authority Chairman Timothy Ridley at the International Funds Conference held earlier this year.
III CURRENT MODELS
A more recent model (but one which is starting to blend with the traditional models as their operations expand) is the specialist professional director who serves no other function. Typically, we now see these individuals grouping together and sharing offices and support services through a licensed company manager. This is a good model but still has some weaknesses. First, how do you get and keep the necessary experience, if this is all you do? Secondly, I doubt the business is scaleable to any great degree. Being a director and carrying out the duties and functions properly is highly personal. Delegation of those duties is limited (much will depend on the articles of association of the relevant company). And even where delegation is permitted, regular oversight and review of the delegates’ performance is essential. Now that does not mean that a professional director cannot have a competent support staff that reviews papers and documents and prepares briefings for him. But he must personally read (and understand) important documents and seek advice on them, if appropriate, and prepare for, attend and participate at board (and committee) meetings. Further, the director must be prepared to take action immediately if circumstances demand. Finally, the decision making responsibility is his alone; that cannot be delegated.
Perhaps I can put in clear perspective what will not do by quoting Mr. Justice Ramos of the Supreme Court of New York State in the Beacon Hill litigation on 19th June 2008:
“The undisputed evidentiary record demonstrates that the Directors ceded control of the Fund to the Investment Managers, permitted them to operate the Fund with impunity until they were removed by the SEC, and appear to have ignored their own responsibilities to the Fund by failing to review the financial statements, despite attesting to their accuracy in the Representation Letter.”
It is interesting that the recent financial crisis has lead to a number of high profile resignations from the boards of major corporations because those resigning felt unable to devote the necessary time and energy to these corporations (not least because they were CEO’s of other corporations that required all their time and energy!).
All of this necessarily limits the number of directorships any one person can prudently take on. What that number is will vary depending on the type of company, its activities, the number of board meetings required each year (factoring in the possibility of unscheduled emergency meetings) and the expertise, capacity and willingness of the individual director to put in the hours needed to do the job properly.
IV SHOW ME WHERE I SIGN
There is the perennial joke about certain service providers so keen to get new business that they just say “show me where I sign” without understanding the transactions, reading the documents or asking any questions. This has been shown to be a recipe for disaster. An issue that has developed over the years with the increasing sophistication of the structures and transactions is that it is often extremely difficult to fully understand the complexity and the risks. Long Term Capital Management in 1998 and recent history (synthetic and derivative instruments) suggest that even those rocket scientists who create the structures and transactions in New York and London do not fully understand them or the potential risks either. Relying on the promoter to cover the bases and backstop exculpatory and indemnification clauses and insurance to protect the service provider and directors is wishful and flawed thinking.
This poses real difficulties for individuals who are asked to serve as directors and approve and oversee the structures and transactions. One solution is to turn the business down (increasingly likely post 2008); another is to reach out to persons who have the necessary knowledge and expertise to serve (there are very few in Cayman and they are becoming very expensive); another is to train employees better and to give them the skill sets they need. But perhaps the best long term solution is to recognise that the directors may not have the in-depth knowledge to understand the intricacies of a broad range of structures and transactions (after all how many directors of General Motors actually understand what makes a car work or, it would appear from recent events, understand much of anything at all?) and to build into the deal the wherewithal for the directors to retain outside advisors who can fill the gaps in their expertise.
Next month read the concluding part to this fascinating series.