The tussle between fund directors and investors

Fund director duties and their capacity to discharge them effectively have been debated for some time. A panel at the GAIM Ops Cayman conference in April presented the latest suggestions for improving fund governance. 

 

As the Cayman Islands introduces a new law to register and license directors, the discussion to improve governance standards among mutual funds is evolving.  

William Jones, founder and senior partner of directorship firm ManagementPlus Group and Daniel Summerfield, co-head of responsible investment at USS Investment Management, summarized the current state of debate in a panel at the GAIM Ops conference in April. 

For an institutional investor representative who has fervently advocated capping the workload of fund directors to ensure that they can effectively carry out their duties, Summerfield presented a more differentiated view this year.  

When USS first went into the hedge fund business, the U.K. pension scheme came up with a number to determine the maximum relationships that a fund director could handle in practice. Now, Summerfield says, the approach is more nuanced, and a cap has to be decided on a case-by-case basis taking into account the different company models and supporting infrastructure underpinning the work of each individual director. 

This means investors have to understand whether an individual has sufficient time to discharge their fiduciary duties. Especially during a crisis, it is important how much time a director can dedicate to a fund that is in difficulty. 

Jones agreed that, in hindsight, his 53 relationships during the financial crisis were too many to manage, but he noted that coming up with a specific number would be difficult since some managers are better at crisis management than others. Any maximum threshold for the number of directorship positions will be different for each director, but there still is such a number, he said. “I have reached a number of relationships that I am comfortable with, that is somewhere between 30 and 40 depending on what they are.” 

The difficulty in determining a director’s capacity to deal with multiple relationships was also influenced by the fact that a director’s role and responsibilities had never been properly articulated, said Summerfield. And until a definitive version of the role of responsibility of a director has been agreed on, the issue of capacity remains. However, the Weavering decision, which outlined the duties of a director in more detail “really helped,” he said. 

Yet while the understanding of a fund director’s duties has evolved, it is still difficult for directors to know what investors expect from them and for investors to assess if what they expect is done properly. 

Jones said the Weavering judgment did not change the extent of directors’ duties, but rather defined what they should already be doing. The difficulty was to overcome abstract language and determine what exactly investors mean when they talk about directors discharging their duties. 

For Summerfield it does not mean doing the management, but overseeing the management and ensuring that the managers are acting as good stewards of the business. However, it is impossible for investors to assess if this is the case given the lack of any minutes or annual general meetings, he said. “How on earth are we to know what is going on?” 

As a solution, he advocates an annual declaration by the director that the fund is run correctly, that there is no style drift in terms of the fund’s investment strategy, that the valuations are carried out correctly and that there are no instances where the manager’s interests have overridden those of the investors. 

Jones said the practice would be analogous to the representation letters given by directors to auditors. But he cautioned that a representation letter would not mean that the director is certifying anything, as directors largely have to rely on service providers and the managers doing their duty.  

“I actually like the idea the directors state that they believe to the best of their knowledge that the service providers have carried out their duties,” he said. But the key issue would be higher costs if the service providers need to be supervised more directly.  

He also endorsed annual general meetings, a practice that was stopped for Cayman funds several years ago as it was considered cumbersome and making Cayman uncompetitive.  

“Do I favor an AGM or virtual AGM context where a board has to respond to investor questions as best as they can? Absolutely. It is something that should happen more often,” he said. 

Meanwhile, the essential problem that investors are expecting directors to effectively challenge their paymasters is difficult to overcome, said Summerfield. “Why would an investment manager appoint a director who has the reputation of challenging managers?” 

However, directors must not necessarily limit their role to a management oversight function. More than just a legal function requirement, they can be a value creating proposition, he said.  

European managers, in contrast to U.S. managers, are more advanced and understand that boards can add value, while Hong Kong managers are starting to get the potential benefit of corporate governance, agreed Jones. “Other managers don’t understand and don’t extract that inherent value.” 

Dan-Summerfield

Daniel Summerfield

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