| MPI Presents Training Session to the SEC |
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| Written by C. Meyrick Payne | |
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Management Practice Inc. (MPI) was recently asked by the Securities and Exchange Commission to present to a group of about 100 employees as part of their ongoing training program about mutual fund governance and the world of independent directors. We presented in five modules:
1. Influence of Fund Directors We began our presentation with an overview of the structure of the mutual fund industry, focusing in particular on the influence of independent fund directors. There are approximately 2,700 independent directors in the U.S., who oversee assets totaling roughly $8 trillion of America's wealth. Of particular interest is the fact that just 306 of these directors -- those of the 30 largest fund complexes -- govern roughly 75% of all mutual fund assets. 2. The Investors Perspective of Fund Governance Meyrick Payne, senior partner of MPI, then changed gears -- as well as his wardrobe -- and donned a sweater to perform a playlet titled "Hear My Voice: What a Fund Customer Wants from a Fund Director". Playing a fictional character -- an investor from Ohio named Harry -- he describes his opinions and requests of his mutual fund's board. Concerned that portfolio managers are the richest people living in his community, Harry wants to be sure he is getting a fair shake on his savings investments. He understands the risks involved but wants them minimized where possible. He counts on the board to make sure his fund has none of the abuses he's been reading about in the press. In particular he expects the fund directors to look out for conflicts of interest, and to keep an eye out for inflated expenses and management fees. And if the management company is getting "favors" like IPO allocations, he -- Harry -- wants to be sure he gets his share. What Harry does not want is the fund directors interfering with the stock selection process for which he has "hired" the management company. The performance was presented in an easygoing and fun way that helped set the tone for many of the other issues that came up throughout the day. Recently reviewed in an issue of Barron's, the playlet put into perspective what the issue of mutual fund governance is truly all about ó looking out for the investors. 3. The Role of the Chairman (or Lead Director) MPI's presentation then tackled the delicate -- and controversial -- issue of the role of the chairman. Meyrick Payne used a consulting tool developed by McKinsey & Co. called "spectrum analysis" to define the authority of the Chairman in four important roles. First, as leader of the governance process, which includes allocating the CCO's time and other resources to compliance and oversight tasks. Second, as leader of the board itself; this includes committee structure and assignments, board evaluation, agenda setting and other leadership tasks. Third, as principle negotiator with the management company on sensitive issues; these may include change of control, succession planning and changes in distribution. Fourth, as a representative of the Board to the fund industry generally; on such industry wide topics such soft dollars, best execution and 12b-1 fees. Of course, some boards may choose not to have the Chair or lead director assume any of these powers. 4. Differentiating Good Governance from Micro-Management The fourth segment looked at the decision-making process involved in the governance of a mutual fund. There are numerous parties involved in each decision, including the board (both interested and independent directors), the chairman, the management company, and legal counsel. Their input can range from initiating an idea, advising on it, ratifying it, deciding it or vetoing it. Using a matrix developed for Winston Churchill in World War II to delineate who has the authority to decide specific issues, MPI posed many issues which come before fund boards with a view to defining who has the decision responsibility. This "decision-matrix" helps to confine the fund board to topics where they have responsibility and not to wander into micro-management. 5. Simulating Contract Renewal The final segment, a simulated contract renewal board meeting, provided the SEC staffers with insight into what is like to negotiate terms of the advisory contract. Several senior members of the SEC sat at a make-believe board-room table and lived through the "give and take" of a fee negotiation. Particularly intriguing was the selection of two SEC managers to play the role of the inside directors, who pushed the perspective of the management company. Others took an aggressive view of fund fees but hiccupped when confronted with the economics of the business. *** The tools used by MPI in this training session are readily available and can be used by any mutual fund board. |
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