One of the last service providers to come under the wing of regulation, directorships are a booming business in the Cayman Islands with a wide variety of models and choices for investors.

Directorships are a hot button issue in Cayman. Debate – or discussion depending on who is talking – about whether directors should be regulated is exercising the community as well as the Cayman Islands Monetary Authority (Cima).

Views, like the different models of those providing directors, are varied and many. The last of the major service providers to the hedge fund industry, independent directors for many years garnered no more than the occasional glance. With the financial crisis their role and importance was highlighted in dramatic fashion.

With the coming of institutional money, the role has also come into sharper focus with many investors now taking care with the appointment of directors.

As usual Cayman is leading the way. No where else is there such a high concentration of expertise in the industry and so it was a natural development that here too a variety of companies offering director services would emerge.

And with this evolution has come some fierce debate about what is acceptable and proper. No one seems to have found the answer. The vast majority agree that Cayman will be expected to lead the way in this area but Cima is less than certain how to proceed. The environment in which funds operate, with the vast majority now firmly under a regulatory regime of some sort, is still evolving. So far the directors of funds have escaped the notice of most regulators but few doubt that will remain the case for long.

In the lull before that particular storm, the community of directors in Cayman are keen to find some common ground in order to introduce more transparency and some oversight into the industry.

The Cayman Islands Directors Association (Cida), formed in March 2008, is now one of the largest professional organisations on the island. Its members sign up to a code of conduct based on that used by the UK Institute of Directors. Set up by Paul Harris, chairman of International Management Services and himself an independent director for hedge funds, Cida claims as its members most, but not all, of the independent directors operating from Cayman.

Having first come to Cayman in 1967, Harris is in a good position to talk with authority and knowledge about the evolution of the service. He reflects that when hedge funds first started being a big business for Cayman, directors were provided by service providers, usually fund administers, as part of that service.

He sees the evolution of the service as natural. Some of the people providing directorships on the island, he admits, may not have quite caught up with the times. The days of being able to hold hundreds of directorships for a very low fee he believes are long gone. However, like many in Cayman he also thinks the market should decide, at least initially, what kind of director it wants. Many in Cayman agree that a choice of models is good for the market and reflects the different needs of hedge funds, their managers and investors.

“Yes, we do have critics of the Cayman model but if you ask what it is that people criticise there are no examples. We have discipline. At the association the members adhere to a code of conduct,” notes Harris. “We have procedures in place if anyone wants to make a complaint about another director. But so far the complaints have been fairly petty.

“For anyone not in the industry, they would be overwhelmed by the idea of one person holding 100 directorships. But in hedge funds that came to be common practice and still is for some. This does not mean that these directors do not provide corporate governance. It’s more like a trustee for thousands of trusts. No one questions that model,” says Harris.

There are two models that exercise most minds in Cayman. One is where the larger law firms like Maples and Calder and Walkers, for example, have as part of the group offering a separate directors’ business. Many question whether such structures can be truly independent and worry about conflicts of interest. The other model coming in for some amount of criticism is based on that of the auditing profession, with a large team of support staff helping directors cope with the demands of multiple funds. The single director still exists but is becoming less prominent as a variety of business models – ranging from a partnership of two or three to the larger groups employing 60 or more people – compete for work.

“I think every time you hear criticism it regards transparency or the number of directorships,” says Harris. People are worried that without some kind of framework governing the actions of directors, Cayman could be forced into stricter rules from onshore jurisdiction. “Other jurisdictions want to take business away from Cayman. They will seize on what they see as our Achilles heel. I think we need to take a more considered view and not jump to any hasty changes,” says Harris.

One of the most prominent and talked-about businesses providing directorships is DMS Management, set up by Don Seymour, former head of the investment services division of Cima and credited as the creator of Cayman’s regulatory framework for hedge funds.

In a recent paper on the industry, Seymour defended DMS’s models and others like them. “Director capacity has to be managed within the particular responsibilities owed to the fund and the resources available to the director. This can vary significantly from fund to fund, so it is not possible to determine an exact number.

“Rather than trying to deduce what a director may be doing outside his responsibilities to a particular fund, stakeholders should focus on what work the director is doing for the particular fund. This direct approach eliminates the need for any guesswork by stakeholders,” he wrote.

“Effective fund governance has advanced beyond the single person concept and today is a process, a system of checks and balances, designed to maximise value for investors,” he says. “DMS has been leading developments in fund governance for the last decade, implementing transparency mechanisms.”

Ronan Guilfoyle, one of the directors at DMS describes the model. “We have a professional service firm model. This may be unusual within the directorship space but it is a proven model that has been tried and tested in the audit, legal and administration professions in Cayman and elsewhere. The structure we have uses support teams, very much like audit firms. We have associates and senior associates like a senior and junior audit team. We have associate directors who are themselves former audit directors or chartered accounts as associate directors and at director level. We work together.

“There are three levels of review. In the first the associate or senior associate is the first set of eyes on documents and the associate director provides to the director documents for sign off and approval.

“What’s unique with us is that not many use this model. As many of us are former auditors and fund administrators, we’ve seen that this infrastructure and set up works and there is no reason that this won’t work in the directorship space.”

At the other end of the spectrum of companies offering directorships is ARC Directors run by Alan Tooker and Ramona Bowry who have recently been joined by a third director. “This gives us a bit more flexibility if clients want three directors. It makes coverage easier,” explains Tooker. He, like other directors in Cayman, is careful to ration his directorships in order to give funds on whose board he sits adequate time. Alan says a couple of funds on which he sits may be winding down over the next few months and this could free some time for him for new clients.

Another area that is being talked about is fees. Most directors say if a client starts a conversation asking how much a director charges, they know it will not be a good fit. Tooker agrees. “We both need around $10,000 each,” says Tooker. “We see quite a bit of people asking for $1,000 or $2,000. That’s not serious and is a waste of time.” Bowry echoes his words, adding that people need to change their attitude towards director services.

So far regulations have had little impact on directors. “We act as directors for fund managers and companies domiciled in Cayman. It’s too early to tell how regulation like the Dodd-Frank Act will play out and what requirements we may face,” says Tooker. Bowry adds: “We don’t object to regulation. It is necessary.”

A relatively new director offering in Cayman comes from Global Funds Management (GFM). One of its newest members is Patrick Agemian, who joined in September 2010. Previously, Agemian was a managing director for Citco Fund Services and a member of the management team, responsible for operations in Cayman. He says he has been thinking about the transition from fund administration to directorships for some time. While he found the job at Citco enjoyable he wanted something different.

One of the other directors he works with is Grant Jackson, former regional manager for Goldman Sachs Administration Services, responsible for the offices in Cayman and Toronto. Both share a common philosophy in setting up GFM. They wanted to use their years of experience (15 for Agemian and 14 for Jackson) in a different area. The idea is to provide a low-volume, high-quality service, building on the experience and independence of the directors to add value to fund boards.

They both believe they have the expertise and knowledge to be of real value to investment managers and help them with the challenges of regulation. Their practical experience, say the two, is not just theoretical. Both have been on the sharp end of the business and have had years of experience dealing with lawyers, offering documents and the minutiae of fund management.

Like other managers in Cayman they are concerned that this service industry maintains high standards. As more institutional investors move into hedge funds, both believe it will be important to have a service industry that meets their expectations. While neither believes regulating the number of directorships a person holds is the right way for regulation to go, they would like to see more transparency in the sector and agree that Cima could make some of the information it holds available to investors and fund managers.

Harbour specialises in the provision of directorship and related fund fiduciary services. Established in 1982, Harbour is owned by Rawlinson & Hunter in the Cayman Islands and provides all fund fiduciary services on behalf of the firm. It is independent and is not affiliated with any law or audit firm, fund administration or any other company operating within the funds industry.

This is an important distinction for Alan Milgate, director. At Harbour he says the directors support each other but make all their decisions independently. While he agrees it is fine to pool resources for supporting services, it is still up to the director to make the final decisions.

He also believes the role of director has not really changed but that people now expect much more from directors. He believes having a range of models (and fees) is good for the market and that choice is healthy.

Milgate admits there has been a lot of talk about the role of directors and the various models seen in Cayman. While he agrees there is an immense fiduciary duty, he does not want to see regulation imposed on the sector. While maintaining the status quo is probably not acceptable, admits Milgate, he believes the investors will be the ones driving change. He has already seen due diligence on directors tighten following the financial crisis. His hope is that as the sector grows and more people set up as directors Cayman will lead the way in best practice, supporting a value-added service that is not commoditised. He appears to be in favour of some sort of licensing regime by Cima but admits a lot of discussion needs to take place before anything is implemented.

Yet another model for supplying directors are the organisations spinning out of legal firms. Walkers Funds Services was set up to provide specialist services, including directorships, to the offshore funds industry. Georgia Prinsloo is one of the newest directors to join the company, making the transition from Walkers law practice to the directorship side. “I was interested in the commercial aspects of funds. Having worked in the legal funds group, I bring a different perspective, a legal background compared with the rest of the directors who have an auditing or fund administration background,” she says. The team of directors now number eight with one in Dubai.

Scott Lennon, senior vice president, plays down the idea of any conflict of interest with the law firm and believes there is no cause to doubt the independence of the directors. “As directors we seek independent legal advice. If we thought there was a remote possibility of conflict of interest with the law firm, we would deal with it,” he says.

On the regulation of directors, Lennon believes a Cima held register covering directors might a solution but questions the real value of such a listing. He points out that investors already have full access to what each director is doing through the due diligence process. Prinsloo believes a register may be something to consider but questions the benefit for a global industry.

It is clear whatever the outcome of the debate in Cayman the role of directors is of increasing importance. While investors are likely to drive immediate changes, Cima needs to consider what its options are and what level of regulatory oversight is appropriate and fits in with Cayman’s existing framework of licensing and legislation. 

Qualification for directors promoted

One innovation taking root in Cayman is the attaining of a qualification as a director offered by the Chartered Secretaries Canada. This organisation is the Canadian division of the Institute of Chartered Secretaries and Administrators (ICSA), the global organisation that supports the international designations ACIS and FCIS to a network of 45,000 corporate secretaries, administrators and other governance professionals.

It now offers a qualification for directors of public, private, not-for-profit or governmental organisations. The first courses have been held in Cayman as so far 23 members of Cida have passed and are now able to add the qualification to their names. Paul Harris was one of the first to take the two-week course. He believes this is another stop along the evolutionary road for directorships.
 
The course covers a wide range of subjects and for hedge funds directors is specifically tailored. Some of the course material covers governance, financial disclose and reporting, accounting concepts and financial statements among other relevant areas.

Harris hopes more courses will be held in Cayman and that the qualification will catch on not only with independent directors but also with fund managers and investors who will come to see it as a competitive edge.