The Decade of the Fund Director Print E-mail
Written by Meyrick Payne and Jay Keeshan   
The 10-year anniversary of the “Market Timing” scandal prompted MPI to look back at a decade that has seen a dramatic evolution of the fund director role. This bulletin examines how changes in the industry and the economy have affected their duties and responsibilities as well as their public profile and, correspondingly, their governance practices and compensation.  
  
In September 2003, a small hedge fund in New Jersey was charged with trading shares of mutual funds after the market close, allowing it to earn $30 million in profits at the expense of fund shareholders.  The aptly named Canary Capital case was a portent for the fund industry and set fund directors off on a new trajectory that continues even today.
 
The mutual fund industry in 2003 was just recovering from the tech bubble and had roughly $7 trillion in assets under management—about half of where it stands today.  Mutual fund directors, while certainly busy and serving an important role, were not high on anyone’s radar. The fund industry had seen substantial growth over the previous few decades, but the director job had remained relatively straightforward.  Most boards met just four times a year, often for just a half a day or so.  While it could never be considered an easy job, there were few surprises and even fewer legal actions in which they were named.  
 
But along with the timing scandal, a new breeze had begun to blow for fund boards. Sarbanes-Oxley was freshly minted, and while designed with operating companies in mind, mutual funds were not excluded.  As an example, its impact meant more attention and meetings for the audit committee, as well as the designation of, or disclosure of the lack of, an Audit Committee Financial Expert.    
 
Directors soon gained additional resources to help them perform their duties.  In 2002 the Mutual Fund Directors Forum was organized to offer leadership, education, and guidance regarding best practices in fund governance, followed soon thereafter by the Independent Directors Counsel. Then in 2005 boards became responsible for their Chief Compliance Officer, who now acts as a critical “eyes and ears” in helping boards oversee compliance.
 
The SEC began to focus more on fund boards, starting with Chairman Donaldson’s attempt in 2004 to mandate an independent chair.  While the rule never passed, it created great debate, and the majority of boards soon shifted from an insider chair to an independent.  Board self-assessments, uncommon before the scandal, became mandatory in 2006.  Today we regularly hear SEC officials mention directors, putting more pressure on them than ever before, calling them “critical gatekeepers” and demanding “constant vigilance.” 
 
Legal exposure for fund directors was relatively limited before 2003, with few stories to tell regarding directors sitting in court.  Now legal activity is a genuine and everyday concern, whether coming from the plaintiff’s bar, the SEC and other regulatory bodies, and even their own management companies.  While virtually no charges or financial penalties have ever been imposed, numerous directors have faced legal actions in the past few years on several issues including valuation, contract oversight procedures, and more recently, the trend of excessive fees cases.
 
In 2008, just as the industry had regained its stride, came the financial crisis.  While overall the industry remained resilient, the crisis did not pass without immediate and lasting impact.  Directors were called into additional meetings—sometimes weekly or even daily—as each aspect of the crisis unfolded.  Money market funds, previously a stable element in many fund lineups, became the squeakiest wheel, and many of them were liquidated or merged.   The fate of those remaining, along with the other effects of Dodd-Frank on the industry, is still to be determined.   
 
Finally there is the fund business itself, which continues to evolve at a brisk pace. Directors are challenged with staying current with a steady flow of new products, strategies, securities, derivatives, and distribution channels, increasing the need for education and expertise.
 
The impact of all of this has directly affected boards in numerous ways:
 
  • Education – From well-established “onboarding” programs to regular “deep dives” and site visits, directors are now much more immersed in the industry.  Numerous conferences throughout the year provide additional opportunities to seek and share guidance.   
  • Director Search -- Searches have expanded well beyond personal connections of current board members into a wide-ranged and well-documented process.  Whereas in the past, general business backgrounds had sufficed, today’s complex industry has many boards searching for candidates with not just fund business experience but specific expertise within the industry.
  • Diversity – While diversity requirements are still not well defined, there is no doubt that both gender and racial diversity has impacted director searches in the past few years; this is particularly evident on larger boards.          
  • Number and Length of Meetings – The increase in meetings resulting from the crisis has become the new normal.  Most mid- and large-size boards have moved from four to at least five board meetings a year, and many meet more frequently.  Meetings typically last a full day or more.  Technology helps facilitate numerous additional preparatory and committee meetings.
  • Committee Structures – The increasingly complex nature of the business and the requisite expertise has prompted many boards to add to their committee structure.   Boards with contracts, investment, and compliance committees have become more common as have fees paid to the chairs of these committees.
  • Board Books – The increasing activity and required documentation caused board books to expand rapidly, with many directors lugging the equivalent of a semester’s worth of text books to each meeting.  As technology advanced, boards started to migrate toward electronic board books; the introduction of the IPad in 2010 appears to have been the “tipping point.”
  • Retirement Policies – Improved health and longevity as well as the value of institutional knowledge have pushed the average retirement age up from 72 to as high as 75 for many boards.    Retirement plans, already fading as the decade began, are practically non-existent.  
  • Compensation – Finally, the effect of all of this activity has not passed without its effect on director compensation.  Comparing our 2003 and 2013 annual fund director compensation surveys, we found that director pay roughly doubled over the time period.  The median compensation of all directors rose from $43,260 in 2003 to $84,798 in 2013.  Directors in our lowest category—one to three funds—saw pay rise from approximately $8,334 to $14,500. And directors in the largest category, which in 2003 was 70 or more funds, were paid a median of $110,666, while directors in the largest category in 2013, 99 or more funds, were paid a median of $260,000.
 
One might infer from this data that director compensation has simply risen in tandem with the level of assets overseen, as both have doubled over the decade.  While this indeed may be true, given the recently increased complexity faced by many directors, and the likelihood that this trend will continue, many now believe that other factors, which better reflect this complexity, should be taken into account when setting director pay.


 
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