Modern Independent Governance in the Offshore Market
Individuals who serve as independent non-executive directors are operating in a role that is constantly evolving. This evolution is not only in parallel with changes in investment funds business but also in terms of regulation and heightened scrutiny on the financial sector generally.
Sean Inggs, a professional fund director at IMS in Grand Cayman and former corporate and funds lawyer, takes a closer look at this evolving role and offers his insights from an offshore perspective.
Given the many recent changes in international transparency and regulatory regimes affecting offshore jurisdictions, offshore corporate governance has had to be more responsive and proactive to market changes and conditions compared to its slightly more static past. The recent financial crisis prompted the rise of increased regulation and this has led to a host of direct and indirect changes on the offshore market.
One example of new regulation offshore (and affecting the Cayman Islands), is that certain Cayman Islands limited liability companies (LLCs) and Cayman Islands companies will now be required to maintain a beneficial ownership register at its Cayman registered office with a licensed corporate service provider.
This new legislation is something in addition to the Cayman Islands’ commitment to assist in combating tax evasion, money laundering, terrorist financing and other serious and organised crimes, by providing greater transparency on ultimate beneficial owners of Cayman entities. This was agreed in an Exchange of Notes with the UK Government and other Crown dependencies and overseas territories in April 2016.
Under Cayman’s already existing beneficial owner verification process, the ultimate beneficial ownership information collected under the new regime is something which is already gathered by corporate service providers. Now, though, it must be maintained in a prescribed form. Governance professionals of Cayman companies will need to make sure that they are familiar with this law and the additional requirements it places on companies where that professional is serving as a director.
The Register will not be open to the public to view or search. The Cayman Islands government has confirmed that it will not consider the introduction of an open public register unless and until it becomes a universal obligation. The most likely end-point here will be the creation of a centralised platform which will allow a specified Cayman Islands competent authority to access the information contained in each Register. Only after a proper and lawful request is made by UK law enforcement agencies will access be granted to the register for the specific request.
However, there are certain types of companies and LLCs which will be exempt from these provisions and some examples include: companies listed on the Cayman Islands Stock Exchange or another approved stock exchange, companies registered or licensed under one of the Cayman Islands’ regulatory laws (such as the Mutual Funds Law and the Securities Investment Business Law) and private equity funds, collective investment schemes and SPVs that are managed, arranged administered, operated or promoted by a person approved by the Cayman Islands Monetary Authority.
With increased regulation comes the potential for increased risks on a company and this has certainly affected offshore governance and the way in which we think about it. Risk mitigation is something which has been gaining momentum and independent directors need to be aware of this for their companies. Independent directors need to devote additional time and resources to the board to identify risks and test for these, manage these and set clear boundaries on when to take action. Compared to a few years ago, independent directors of investment funds and companies affected by financial regulation need to now have at least base knowledge of CRS, FATCA and AIFMD (to name a few).
Compared to pre-2008, the impact of technology on the board room and governance (and the associated cyber security risks that come with that) should be taken seriously and not underestimated. Tightening up on the use of technology in the boardroom should be properly considered.
There has also been a shift in independent corporate governance, and hopefully one set to continue, towards widening the skill set of boards’ experience and expertise. For example, in addition to having accountants and individuals with finance backgrounds, diversifying a fund board with the skills of an experienced lawyer will contribute towards better governance and oversight as well as risk mitigation.
A trend which we hope to see continue is that of companies and investment funds selecting truly independent directors i.e. independent of the law firms and fund administration companies providing services to fund managers and companies. We have seen a rising demand from investors and allocators to see boards of companies populated with directors who have no commercial or employment ties to large law firms and their associated fund administration service providers. This in our view offers an investment fund and its stakeholders an additional level of comfort, knowing that these truly independent directors can properly challenge service providers, avoid potential conflicts of interest and ensure that the best level of service is being offered.a