The rubber-stamping concept comes from the idea that the role of Cayman fiduciaries is to “see nothing”, “hear nothing” and, notwithstanding the foregoing, “sign off on everything”. In the typical scenario, Cayman resident directors are called upon to sit on the boards of directors of hedge funds that conduct their business in financial markets overseas.
In connection with the operation of such hedge funds, it is not uncommon for the directors to delegate certain functions to service providers such as administrators and investment managers.
Notwithstanding that this is a normal commercial practice, which is necessary for any fund to be run efficiently, it does not mean, however, that a director can simply forget about the delegation or fail to monitor the same (or the service providers) or absolve himself from all responsibility.
One way of evidencing that directors are paying attention to their responsibilities is for them to document their decision making in minutes or resolutions in relation to matters affecting the relevant hedge fund.
In some cases, a director may find himself in a situation where a service provider takes an aggressive position in relation to an important matter – for example, an investment manager’s valuation of an illiquid basket of investments in which case the director may, instead of challenging the position, be tempted to simply acquiesce to the investment manager’s pressure (and sign off on resolutions approving what could be an inaccurate valuation) out of the genuine fear that, since the directorship appointment was facilitated by the investment manager, the investment manager could procure the removal of the director from the board of the relevant hedge fund or cease to make directorship referral appointments to that director in the future in relation to other hedge funds. This type of decision-making would, of course, lend to the rubber-stamping idea.
The appropriate decision-making process should, presumably, involve an overall judgment call by the director based on his evaluation of relevant generally accepted accounting principles, feedback from auditors and a review of other information provided by the fund’s administrator and independent valuation agents.
The director must then make a decision in the best interests of the fund (i.e. the interests of all of its shareholders taken together as a whole, while the fund is solvent and, in the case of insolvency or doubtful solvency, the interests of creditors) and then make an accurate record in the minutes of the matters that were considered in reaching his or her conclusion.
Luckily, the majority of Cayman professionals selected to act as directors of hedge funds follow the appropriate decision-making process; they consider their reputation (and that of the domicile) to be at stake in any decision-making process and are finely tuned in to the fact that they have a responsibility to always act in the best interests of the relevant stakeholders in question rather than operating out of fear that, by having a contrary opinion to a large client, the relevant director could be removed from a hedge fund board and, consequently, significant directorship revenues and business could be lost.
What can Cayman stakeholders do to change this impression?
It is noted that some industry stakeholders take the view that, historically, the Cayman Islands have been the world’s number one choice as a hedge fund domicile and, therefore, one can continue to rely on the notion that the good performance of the jurisdiction will speak for itself against false overseas media perceptions. While this view is held by some, the writer is of the view that more can be done by all Cayman stakeholders.
For example, each stakeholder can become more active in the promotion of the sound business practices and professionals, which exist in the Cayman Islands, through the medium of writing articles in the international periodicals, increasing awareness at international conferences, communicating with overseas regulatory bodies and governments (which the Cayman Islands government might continue to do and take the lead as a potential industry stakeholder) and frequently highlighting the same in discussions with clients.
The key, of course, is to continue to reinforce the above so that international players understand that Cayman fiduciaries, including professional independent directors, provide real substance to the boards of directors of hedge funds and are not a rubber-stamping shop.