High-profile hedge fund investors have raised concerns recently about the standard of governance within the hedge fund industry following a landmark ruling on fund directors’ liability. One critical factor that many believe is often overlooked is the role, responsibilities and quality of independent directors.
A few months ago, directors of Weavering Macro Fixed Income Fund were found guilty by the Cayman Islands Grand Court of “willful neglect” and “default of duties” and were ordered to pay damages of US $111 million plus costs to the fund’s liquidators.
Willis communications director Tricia Holly-Davis spoke to me about the implications of this case for corporate governance in the hedge fund world. (My team has responded to the Weavering verdict by launching Fund Protect, a unique insurance solution aimed at protecting the liability of fund directors, particularly in the event of a collapse that exposes them to significant financial costs.)
Why is corporate governance so complex in the hedge fund sector?
Conflicts of interest frequently exist between the hedge fund’s board of directors and the investment manager. This may lead to decisions being taken in the interests of the hedge fund manager rather than in the interest of the fund and its shareholders. For the fund director who has fiduciary obligations, this is a difficult balance.
What implications does the Weavering case have for fund directors?
The recent decision in the Weavering case has caused reflection by independent directors in particular of their roles, responsibilities, and potential liabilities whilst serving on the fund board.
Although the facts of the case have some unique qualities, even in the slightly bizarre non-performance of the Weavering directors concerned, a well structured Directors’ & Officers’ Liability insurance policy taken at board level would likely have offered protection to the individuals concerned, if not for payment of the fine then at least for costs involved in a robust defense of their liability.
As well as ensuring compliance with good governance, it is important going forward that fund directors, and in particular the independent directors, also review how they will be protected in the event of a legal liability claim for breach of duty being aimed at them personally.
The Weavering case has raised questions around corporate governance in offshore jurisdictions. What can fund directors do to protect themselves globally?
The quality of the insurance policy varies from country to country. Independent directors have often been happy to rely on insurance cover put in place by the investment manager locally in their country of domicile. Does this still make sense? Apart from the conflict between the parties in the event of action by investors or liquidators and any practical implications this has, there is also the huge variance in quality and scope of coverage available in different countries.
There are also issues of access by the director to the policy itself – can you “touch and feel” it and be sure of the practical steps to take in the event of a claim? What jurisdiction will apply and can an experienced lawyer be appointed quickly to garner a quality defense?
So is it worth it for fund directors to purchase insurance for legal costs?
As an experienced insurance service provider in the hedge fund sector, we have often been involved in the debate as to whether insurance protection against law suits is a necessity or even beneficial.
Investors have in the past mused that the absence of liability protection keeps the director exposed and therefore focused on fulfillment of his or her fiduciary duties. Directors themselves have suggested that without insurance there will be no deep pocket assets and this in itself will deter claims for breach of duty and financial loss compensation.
Both have seemed rational views in the past. However, in this brave new world, should either investors or directors be brave enough to see if these arguments ring true?
Tricia Holly Davis is Director of Communications for Willis Global and Director of Commercial Sustainability for Willis Group. Prior to joining Willis in London in 2010, she worked as business and finance journalist for the Sunday Times, with a focus on environmental and energy issues.