Recently, The Wall Street Journal
ran an op-ed
by Robert Pozen, chairman of MFS Investment Management, suggesting that public corporate boards recruit "professional directors." No mention was made of mutual fund boards which could also benefit from similar changes. For example, at least one retired mutual fund executive should serve on every board in order to gain greater insight and perspective rarely available to boards. Of course, former executives of the investment adviser would not be eligible.
| Dan Calabria|
Mutual Funds Bureau
President and CEO
Directors should not
determine their own compensation. This practice should be discontinued simply because directors are employees of the fund's shareholders and not an autonomous group without any responsibility to its "employers."
The job of determining director compensation should be performed by an independent third party that would provide an objective evaluation of the board's contributions. That is the only acceptable way to determine compensation and avoid the inevitable criticism that exists otherwise.
Investment Advisory Fees
Investment advisory fees are often scaled down based on total assets under management. For example, the base advisory fee may be 60 basis points ("bps"), from zero to one billion dollars; 55 bps over one billion, etc. The principle is quite simple: higher levels of assets are assessed a lower advisory fee based on "economies of scale."
Directors need to focus their attention on negotiating more meaningful reductions in fees at higher levels of assets. Such reductions have a direct, positive effect on investment performance, which is good for both the advisor and the shareholders, i.e., "less is more."
Selection and "Election" of Directors
Fact: Directors are not elected for life and do not enjoy tenured positions. There are no securities rules or regulations that preclude shareholders from voting for directors whose job is to represent them.
Important requirements for newly elected directors should include: candidates must agree to serve as "apprentice" directors, for a two-year period without voting privileges, with compensation at half the rate of experienced, elected directors. This places the emphasis on knowledge and competence from day one. The effect is to have all newly elected or appointed directors hit the ground running before casting their first vote.
Continuing Education Programs
The industry has to adopt continuing, minimal standards for directors.
A first step is establishing and requiring a Continuing Education Program that must be satisfied by every fund director without any exceptions.
Such mandated programs could be conducted by both the Investment Company Institute and the Mutual Fund Directors Forum.
Annual Shareholder Meetings
Regular annual meetings should be held annually and include:
1. Fund update by the president of the fund.
2. Report on performance and portfolio holdings by the chief investment officer or portfolio manager(s).
3. Election of and mandatory presence of all directors.
Proxy statements should include a written statement by the board chairman reporting on issues confronted and addressed by the board since the previous meeting. In addition, each director up for election or re-election would submit a brief statement relative to his/her election to the board, i.e., directors should provide the basis for their election/re-election to the board in their own words.
Finally, annual shareholder meetings could be broadcast via the Internet, which would make meetings cost effective and available to all shareholders. That's not too great a burden to improve shareholder relations/communications, build shareholder loyalty and confidence while encouraging additional investments - there's no downside.
Unless changes of this nature are adopted it won't be too far in the future when independent directors will be looked upon as an anachronism, superfluous to fund shareholders. If so, shareholders will be the losers and management companies will lose the "shield" provided by independent directors with the potential for undesirable results.
Dan Calabria is the president and CEO of Mutual Funds Bureau LLC, and the author of book Mutual Funds Today...Who's Watching Your Money? Calabria is a former president and CEO of Templeton Funds
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