Independent directors in the Cayman Islands: key benefits and considerations
An independent director is a member of a board of directors who has no other links with the company other than sitting on the board. They have no material or pecuniary relationship with the company or related persons. They are neither part of its executive team nor involved in the day-to-day operations of the company. So why would you consider having an independent director on your board?
The Cayman Islands have been subject to several high-profile fund failures and fraud investigations in recent years. It's important that funds take steps to prevent this type of outcome by, for example, appointing an independent director to the board of an offshore fund.
Already, this is becoming something of an industry standard. Today, investors are becoming more sophisticated, and so are their investment requirements. Appointing independent board members will ensure that investor interests are prioritised and that funds adhere to all local rules and regulations. Independent directors also help deter mismanagement, fraud and gaps in governance.
What is an independent director?
An independent director acts independently of management. They are free from any business-related constraints or relationships which could interfere with their ability to act in a company’s best interests. They assist in monitoring and guiding the board in management. They can also act as a watchdog, ensuring good governance and enhancing a company’s image. Whether the director is independent or not, they all have the same duty: to protect the interests of a company, its shareholders and its employees.
What is the role of an independent director?
An independent director’s role includes improving and maintaining the quality of governance of a company. They also ensure that all parties act in the interests of the company, and not its owners. They owe a fiduciary duty to the company they act for, and must:
- always act in good faith and in the best interests of the company or fund
- use all knowledge, skill and care when acting on behalf of the company or fund
- comply with statutory obligations which relate to the management and operations of the company or fund.
What are the benefits of having an independent director?
As mentioned above, there are multiple benefits to having an independent director on a company’s board. An independent director can guide the company though the complex regulatory landscape and also bring a fresh perspective on how a company should run. They can bring a wealth of experience and skills which complements the rest of the board.
Other advantages include:
- enhancing a fund offering and providing comfort to investors
- assisting with raising capital
- providing insights on market developments.
In practice, independent directors keep a close eye on a fund's performance – particularly in line with the offering document or partnership agreement.
Other areas which an independent director should keep a close eye on include:
- regulatory deadlines, such as annual registration fees
- FATCA and CRS deadlines
- economic substance notifications
- beneficial ownership data management and reporting
- submission of financial statements
- any other deadlines that may incur penalties if missed.
Choosing the right independent director for your fund should entail the same level of due diligence as choosing other service providers.
Resident director or not?
An independent director does not need to be a resident of the Cayman Islands. However, besides the benefits outlined above, onshore counsel may recommend having mind and management in situ in the Cayman Islands, especially given the increasing international focus on economic substance and transparency. A resident independent director can support international tax planning, or meet certain foreign (economic substance) requirements, as well as benefit from tax advantages.
What is the four eyes principle?
The four eyes principle is a process where two individuals approve an action before it's carried out. For example, when decisions need to be made or transaction documents need to be signed, it’s vital that at least two individuals participate in the process. A minimum of two directors is required for applicants that are companies. In the case of a general partnership or corporate director of a private fund, the Cayman Islands Monetary Authority (CIMA) will require a minimum of two natural persons to be named in respect of a general partner or corporate director of a private fund.
Does a director (natural person) need to register in the Cayman Islands?
A director of a private fund in the Cayman Islands is not required to register with the local authorities. However, a hedge fund director should be registered with CIMA under the Directors Registration and Licensing Act, 2014 (as amended) and pay an annual fee.
TMF Group’s Directorships and Officer services
We can provide you with experienced business professionals to serve as independent directors. Our directors come from varied backgrounds, are well versed in local regulatory requirements and cover over 120 offices worldwide. They have the in-depth knowledge and experience required to help you effectively navigate and expand into different markets.
Learn more about our Directorships and Officer services or contact our experts today to find out how we can support your Cayman Islands business.
