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Rikard Lundgren (Steendier), Neil Brown (Independent Director and Fund Consultant): The Independence of Non-Executive Directors of Funds in Luxembourg 

New ILA Publication on Board independence 


Rikard Lundgren


Neil Brown

In July 2022, ILA published a comprehensive publication on the role and independence of Non-Executive Directors, (NEDs).  The publication discusses and defines the important  sub-category of NEDs which are “independent” (iNEDs).  ILA’s publication should be compulsory reading for all boards in Luxembourg. This article will however focus only on iNEDs serving on Luxembourg fund boards and try to add some practical input to boards and fund sponsors on how they can translate the ILA principles into practical policies and procedures.  


Meaning and importance of independence 

On a generic level “independence” means to have no affiliation or relationship of any kind that could, or could be perceived to, compromise the judgement of an iNED with the fiduciary duty to protect the interests of the stakeholders, in particular the fund investors, who rely on the board to make decisions on behalf of them.  iNEDs therefore need to ensure that they do not have any potentially conflicting relationships or affiliations.  As the publication points out, an iNED’s independence means independence towards all external stakeholders, including the fund’s sponsor and all its’ service providers, regulator, counterparties, suppliers, and competitors. It includes parties that assist the iNED to gain mandates and/or participate in the remuneration of the iNED.  


Practical independence framework is key 

The key to maintaining the independence of an iNED is that proper and defined oversight and monitoring of this is done by the fund board. This includes a clear and detailed conflict of interest policy and to identify and record all potentially conflicting interests of each board member. Some boards will go as far as keeping a log of all interests of the iNED, not just those that could be considered as potentially conflicting. In either case, the board needs to decide on whether each interest is reason to not give the iNED the independent status. 

An example; if an iNED has an economic interest in one of the fund’s suppliers, or gets compensation, in whatever form, from a supplier, this needs to be declared by the iNED and considered by the board as a potential reason for that NED to not be considered as independent. Another factor to be considered are existing close personal ties with fellow co-directors. Boards populated by NEDs that are close friends or family need to question how this impacts their independence. Close family or business links to one of the funds’ investors could also be or be seen as potentially problematic for an iNED. More and more iNEDs are full-time professionals running their directorships as a small business. If a significant part of an iNEDs revenues comes from one sponsor, group or platform, the iNED may no longer be classified as an iNED. This is even more relevant when the iNED’s contract stipulates that it may be terminated “ad nutum”.  

There may be other relationships or factors potentially affecting an iNEDs independence, that are specific to a particular Fund. The board needs to define these and get the iNEDs input on them.  


Concluding remarks 

The governance of governance is an important piece of the foundation of trust on which Luxembourg’s reputation as a safe and clean fund jurisdiction, is built. ILA’s publication elucidates the importance of this, by establishing the important underlying principles. These now need to be put into clear policies and practice by fund boards. Some less good practices, which may still occur in the market, are the result of the historic lack of such clear policies or reflects old mindsets which now need to catch up with the new reality of best practice. ILAs publication is the cornerstone on which a broader awareness and discussion of this topic rests and will, we hope, lead to an acceleration of the implementation of better Independence practices.  


Example Checklist for sponsors and boards regarding the independence status of an iNED  

  • Relationship with service providers of any kind 

  • Relationship with the sponsor  

  • Other mandates with and revenue from same sponsor. Can the iNED afford to say no? 

  • Length of service (Should fund board directors be subject to the same max 12 years as for listed companies) 

  • Cooling off period after employment with fund, sponsor or other stakeholder. 

  • Personal relationship with fellow directors 

  • Family relationship with sponsor or large share holders/investors 

  • Any kind of variable remuneration 

  • Is the director sharing the remuneration with any other party? 

  • Term of mandate (Are extended mandates increasing or reducing independence?) 

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