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Article by Alessia Lorenti, Christine Panier and Patrice Molinari, members of the iNEDs LPEA Club
Why is it important to onboard one or more INED in a Board?
In recent years Luxembourg is witnessing a noticeable shift towards enhancing Board composition diversity through the inclusion of Independent Non-Executive Directors (INEDs).
For regulated IFMs and funds, the inclusion of INEDs on the Boards is occasionally triggered by a recommendation by the Regulator, and in the framework of governance inspections, the effective independence of the Non-Executive Directors is often reviewed.
Diversity at the Board level is primarily that of complementing experience and expertise, whether it be in terms of asset class, portfolio management, ESG, distribution, technology, operations, finance, risk, compliance. Such diversity at the Board level contributes to enhancing governance through better decision-making, risk mitigation and ensuring that the entity is best-prepared to face the developments and challenges of a constantly evolving landscape.
Including one or more well-chosen INED in your Board brings an external perspective on industry developments, challenges and best practices, which complement the insights of Executive Directors in the Boardroom, mitigating bias and conflicts of interest, and furthermore enhancing a balanced decision-making process.
The selection and integration process in onboarding these complementing external Board members necessitate particular attention, so as to avoid “casting mistakes” and reach an optimal Board composition in a timely manner. Below we highlight some tools and processes to implement a successful onboarding process.
A mutual selection process
The initial step is the selection of the INED, according to the needs you have identified for your Board composition, such as experience and profile you are seeking to onboard. The selection process goes well beyond background checks you would perform on the INED, you should expect the Independent Director to understand the scope of the mandate and the organizational structure. After an initial interview process of potential candidates for the role, a NDA will generally be signed with the short list of INEDs you have identified, allowing you to secure the sharing of confidential information. The independent director may submit a due diligence questionnaire or request to meet with you to run through their due diligence questions, which will enable them to have a clear overview of the scope of the mandate and perform an assessment, based on which they will be able to confirm their interest for the mandate.
The due diligence information to be shared would typically include:
- Entity scope (including structure charts),
- Service providers and delegates (including confirmation of satisfactory due diligence and oversight, attention points, weaknesses, action points),
- Average number of Board meetings and circular resolutions per annum,
- AML & CTF indicators on the investor base and portfolio investments (e.g. type and geographic origin of investors, investor blocked accounts, investments in high risk countries, investments frozen due to sanctions),
- Confirmation of the appointed RR & RC for the entity,
- Confirmation of compliance with regulatory reporting and filing requirements over the last three years,
- Confirmation of administrative fines by the Regulator or Tax authorities (including amount and reason),
- Confirmation of issuance of management letters by the auditors over the last three years,
- For AIFMs, confirmation of CSSF on-site inspections performed and outcome (including scope of the inspection, material findings necessitating remediation / corrective action outstanding to date).
In addition a comprehensive data pack should be compiled including:
- Incorporation documents,
- Offering documents for AIFs (LPA, PPM, side letters),
- Organizational and shareholding structure, including details of executive management,
- Board profiles with their roles and bios,
- Latest financial statements and auditor reports (last 3 years),
- Details of D&O policy and proof of coverage.
Once the due diligence has been completed and that an in principle agreement has been reached on the financial and contractual terms, the INED onboarding process can commence.
Alignment on the expected role of the INED: the key to a successful onboarding
Onboarding is a critical step, going from an in principle mutual choice to a full integration of the INED in their role. During this period the selected Independent Director should meet with all relevant people for their future role.
- Meeting with the CEO/Chairperson to address any immediate questions the INED may have.
- Meetings with the other members of the Board.
- Meetings with the Chairpersons of the entity’s main governance committees (e.g. Audit, Risk, Investment) and overview of committee roles, current issues being addressed (review of key risk indicators and action plans on current and past issues).
- Ad-hoc meetings to delve deeper into specific topics (e.g. risk management, compliance monitoring, investment strategies, regulatory changes affecting the entity and action plans under way).
- Face to face “in camera” meetings with certain service providers (e.g. for AIFs, AIFM, where a third party AIFM is appointed, auditor, central administration agent, depositary) without attendees of the entity’s executive team, in order to enable the INED to ask probing questions that may be sensitive or difficult, and offer insights into less visible aspects (e.g. relationship transparency, accessibility of information).
In addition, certain additional documents should typically be provided during the onboarding process (if not provided earlier). These may include:
- Minutes of Board meetings (up to 3 years prior),
- Investment memos,
- Agreements with service providers and delegates,
- Portfolio performance reports,
- Operating memorandum (for AIFs),
- Board policy manual and code of conduct (whereby applicable),
- Conflict of Interest policy and procedures,
- Upcoming board meeting schedule and agenda topics (if known),
- Current Projects and Strategy Documents, including the 3-5 year business plan, status reports on significant investments or projects, market analysis and future outlook reports (whereby applicable, depending on the entity type, activities and investment strategy).
Although onboarding may appear time-consuming, it is a valuable investment for both the INED and the sponsor, reaffirming their initial decision to work together. By the end of this process, the Independent Director should have a clear understanding of their future role and how concretely they can add value. Simultaneously, the sponsor should have gained a deeper insight into the INED’s specific skills, which will help to compose a Board of complementing individuals.
Additionally, an optimal onboarding process ensures that the Independent Director will be quickly operational, as they have already met all stakeholders and co-board members and gained a good understanding of the recent history and future developments of the entity.
It is also an opportunity to pave the way for future specific responsibilities (committees, strategic discussions..) and clarify misunderstandings or misalignments between the expectations of the sponsor and the INED, including time commitment of the Independent Director and remuneration.
Onboarding should not stop at the first board attended by the new INED, it should be completed by closed sessions to give and receive feedback, improve future onboarding processes and address any gaps going forward.
Conclusion: After a thorough and mutual selection process, the onboarding phase is a critical step to ensure a swift and complete integration so as to maximize the added value brought by the incoming INED, whereby the Independent Director gains a deep understanding of the situation. This will allow the Independent Director to find their place within a diverse Board and to give their full potential in terms of formulating insightful opinions, contributing innovative ideas and making impactful decisions.
