Folio Corporate Services Director Article – Offshore Services in the BVI.
“Each individual
director owes duties to the company to inform himself about its affairs and to
join with his co-directors in supervising and controlling them. A proper
degree of delegation and division of responsibility is permissible and often necessary,
but total abrogation of responsibility is not. A board of directors must
not permit one individual to dominate them and use them” – (Jones J) Weavering Macro Fixed Income Fund
Limited (in liquidation) v Peterson and Ekstrom 2011 (“Weavering”).
The
circumstances, commentary and findings in Weavering put corporate governance
front and centre in the financial services arena. Despite this there appears to
be a continued reticence on the part of principals or sponsors when it comes to
appointing professional independent directors rather than ‘amateurs’ with a
direct or personal connection to a company.
In
Weavering, the directors were found guilty of willful default and were deemed
to have subordinated their judgment to that of the investment manager. Thus
they were deemed to have breached their duty of care, skill and diligence. As
opposed to a breach of their fiduciary duties of loyalty, honesty and good
faith.
The
commentary and judgment set-out in Weavering has led to certain principles of
good corporate governance, both theoretical and practical, being adopted. In
reality it means that principals and sponsors should review the composition of
their boards and consider more fully the benefits professional independent
directors can bring. The following is a brief summary of what we consider to be
the main practical points to be drawn from Weavering which if considered can be
of assistance to both directors and principals considering the appointment of
professional independent directors;
Skill Any director accepting a position
should be satisfied they have the skills, experience and knowledge to fulfill
their obligations (notwithstanding that for certain vehicles such as funds, the
directors will outsource most of the day to day functions or operations). If
the company in question operates in a specialist field such as a hedge fund or
captive insurance company, then directors with specific knowledge of the
relevant field can add substance and value. It should be noted however simply
because a director has specialist knowledge, it does not mean he should seek to
overtly interfere with the specialist operations, e.g. a director should not
seek to be a pseudo-investment manager. The director should perform a “high
level supervisory role” making sure that the company, its structure and its
operations (contracts, service agreements etc.) are in line with industry
standards.
Application Directors must exercise independent judgment
and should not become an automaton or subordinate their judgment. A director
must apply their own mind and judgment based on circumstances and not merely
rely on explanations or information provided by connected or related parties.
Communication & Board Meetings Directors should educate themselves
about the business of the company and each director should acquire and maintain
a sufficient knowledge and understanding of the company’s business to enable
them properly to discharge their duties as directors. This is a continuous
process on the part of the director and it is where tailored regimes and
methodologies specific to the mandate will add value for all concerned. Regular substantive board
meetings need to take place, with a proposed agenda circulated and agreed upon
prior to a meeting. Meetings should not be a matter of going through the
motions as such meetings are pointless and add no value. Substance will be
achieved through having the relevant matters at hand (as per the pre-agreed and
circulated agenda) dealt with. This is where the knowledge and involvement of
the mandate by the director is key and where each director can aim to add
substantive value in an effective manner.
Crisis
management In times of a crisis the correct
course of action for a director is not to retreat into a shell and do nothing
or indeed resign and attempt to distance themselves from the crisis. A director
should research, consider and if necessary or appropriate debate matters in a
logical and reasoned manner then apply their knowledge and understanding of the
mandate and the circumstances to create an effective or optimum resolution for
all concerned.
Indemnities Be it one entrenched in the constitutional
documents of a company or a separate agreement, an indemnity is intended to
protect conscientious, well meaning directors from frivolous actions. Not those
who have no intention of fulfilling their obligations from the outset. Principals
and potential directors should use this as the basis to discuss and agree the
requirements of each party, set expectations of the other and establish, agree
and understand the scope of the work to be carried out by service providers and
third parties.
Recordkeeping In line with current industry
best practices and policies, recordkeeping by directors is now of paramount
importance. As professional independent directors will usually be supported and
assisted by professionally qualified and experienced staff, they will have
sufficient resources to follow industry best practices and will be able to
demonstrate how they have applied their minds to the decisions they have
taken.
Fees Fees payable to directors should be
commensurate such that directors have sufficient time and scope to discharge
their obligations and responsibilities.
In
summary, principals and stakeholders should view an
experienced and professional independent board, employing the findings of Weavering, along with established
good corporate governance principles, as an added protection mechanism. In
practical terms, stakeholders should demand
constant vigilance and the application of considerable professionalism, time
and expertise from directors in the discharge of their duties. For stakeholders
using this professional approach can surely only be viewed as a positive
development.