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| Best Practices: On the Board |
Fund Follies
Gayle B. Ronan
08/01/2005
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Several other issues may come up for industry or even
government scrutiny in the near future. First is the question of how many funds
a single board can reasonably be expected to oversee. The ICI guidelines
recommend either a single board for all funds or cluster boards for groups of
funds within the complex, rather than a single board for each individual
fund.
The Limits of Oversight
To answer investor concerns that one board cannot
adequately oversee management of upward of 100 funds, the SEC is requiring that
boards conduct an annual assessment of their capabilities. For many directors,
that is a preferable alternative to setting limits.
“The number of funds one
oversees does matter,” Driscoll says. But she believes it matters because the
more funds a board oversees, the more professional the board must be to do its
job well. “If you have 140 funds in a complex, you want one board, not 10 boards
overseeing 14 each. Not only is that a waste of shareholders’ money, it dilutes
board power over the advisor. You also run the risk of the individual boards
creating policies that are at odds with each other. Basically, it’s like saying
Procter & Gamble should have a board for each product.”
Another area the
SEC may address in the future is elections. Some investor advocates are calling
for annual elections, which most directors see as unduly expensive. Driscoll,
who believes elections should be held no more often than every five to 10 years,
says, “It’s not like a publicly traded company where you have big institutional
investors that keep the numbers down. Mutual funds have millions of individuals
who have to be solicited. Where independent directors are responsible for the
selection of the other independents, there is already a lot of shareholder
protection built into the system.”
The mandated change to an independent
chair may prove a more troublesome compliance challenge for boards. Many
directors feel it defeats the SEC’s goal of greater independent control by
removing the ability to choose the best director to serve as chair; many prefer
the ICI suggestion of installing a lead independent director to work with a
management chair. The mandate for an independent chair will not necessarily
guarantee a leader who emphasizes shareholder concerns above all others.
According to Bodurtha, “Under our [independent] management chair, whenever we
asked what we could do for the shareholders—which we do at every meeting—the
question of cost versus benefit was never an issue.” Even so, he acknowledges,
Merrill Lynch’s recent switch to an independent chair, which was brought on by
the retirement of the management chair rather than SEC mandate, noticeably
changed the tenor of the board meetings. “With an independent chair at the head
of the table, there is even more of a slant toward the shareholders,” he
admits.
Everyone, dissenting commissioners included, seems to agree
the SEC must tone down its rhetoric and watch how the changes it has set in
motion over the past few years play out. As much as directors may resent the
interference, most seem to realize that these changes are now part of the
fiduciary duty of being responsible for billions of investor dollars. While
critics of the SEC’s amendment continue to argue that the commission acted in
haste to simply show that it was doing something—anything—to try to create a
more level playing field for mutual fund shareholders, the rule changes actually
offer little in the way of new protection.
Gayle B. Ronan, a former private banker and advisor, writes frequently about
wealth management. ronan1@comcast.net
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