[7] Onshore investment fund are typically formed as limited partnerships (LPs) in the United States, most commonly in Delaware.
[7] The governing body (board) of the LP is its general partner (GP) which is usually under the sole control and direction of the investment manager or fund sponsor.
These factors should reduce the required time investment and increase the scalability of the director's human capital such that it can be employed efficiently across many funds.
This mindset appears to be supported by the law in several jurisdictions that mandate that only “natural persons” provide director services.
[14] Opponents of the proprietor approach argue that boards should not be “dominated by part-timers at a time when they need to be vigilant about avoiding future crises”[14] and that professional funds “would never buy legal services or management advice from people only willing to spare a few hours a month”.
Lawyers, consultants, accountants, doctors, and so on, all associate with each other to form corporate entities to provide their services for a host of well understood reasons".
As such professional fund governance firms have the “economies of scale to attract the best board members, introduce more rigorous training programs and develop the best proprietary knowledge”[25] plus economies of scale and scope allow firms to increase quality and/or lower cost by finding efficiencies in production, spreading fixed costs across a larger asset base and investing in technology.
[22] Independent researchers further argue that BSPs bring “collective expertise, from the ability to process huge quantities of information to specialist advice”[25] use the power of technology for business intelligence, process management and information access to make fast and accurate decisions.
Investors in the funds lost approximately $1.6 billion and “the two supposedly independent directors appointed by Walkers to serve Cioffi’s two hedge funds were Scott Lennon and Michelle Wilson-Clarke”[26] were found by the Cayman Islands court to be conflicted as they were employees of an affiliate of Walkers.
In his judgment the Chief Justice of the Cayman Islands said “For reasons which I need not elaborate now (but would be prepared to if asked), I am led to an irresistible impression that the manner of the conduct of the directors, trustee and the lawyers advising them” — all Walkers employees — “over the resolutions for winding up was clandestine and suspicious and was certainly in breach of the strict prohibition — against such a resolution being taken during the pendancy of the investors’ petition for the removal of the directors.
[28] He was later disqualified as a director by courts in Guernsey and the U.K. yet he was only one of “a group of residents who between them held directorships of thousands of companies scattered far and wide”.
[27] These individuals were engaged in “the totally unacceptable practice of renting out their names as company directors without any real knowledge of what the companies are up to.”[27] In response Jack Straw, the Home Secretary commissioned Andrew Edwards, former UK Treasury director to investigate these practices among Britain's offshore dependencies.
[29][30] In 1998, the Edwards report called for various reforms including that “Guernsey, Alderney and Sark should introduce a system of licensing and registering directors and bring in a code of conduct governing the standards expected from directors and trustees.” The Edwards report “also called for a limit to be set on the number of directorships held by individuals, suggesting a ceiling of five trading companies or 30 asset-holding (fund) companies”.
However, they were later found guilty by a Cayman Islands Court of being negligent in carrying out their fiduciary duties, and were held liable for US$111 million in damages.
The Weavering Capital Scandal became notorious because the Managing Director of the UK Management Company, Magnus Peterson, was jailed for 13 years on 8 counts of Fraud in 2015[35] and the discovery that he had illegally used investors money to fund personal projects such as the Grey Wolf (Film).
[14] Busy professional directors are more common among funds that derive higher benefits from external certification and monitoring, and their departure from the board is associated with outflows of investor capital.
[39] If a serious conflict arises with the manager the degree to which the board can effectively act in the best interests of the fund can be neutralized in these circumstances.
The voting shares give the manager complete discretion over the appointment and removal of directors; therefore controlling board composition and the ability to veto any of its decisions.
[41] However, these loose arrangements often lack the operating discipline and reputational investment of their large professional firm counterparts.
Independent research[14] has found that professional firms of quality directors have large reputational investment with high incentive to perform well and consistently outperform proprietorships.
[43] The lead director may also be the chief contact for the board's counsel or the fund's auditors (or other service providers).