Do I Really Want to be a Mutual Fund Director? Print E-mail
Written by C. Meyrick Payne   

A playlet about a discussion between a candidate for Fund Directorship and his or her spouse
A one act playlet written by C. Meyrick Payne, partner of the mutual fund governance consulting firm, Management Practice Inc., and performed for the Mutual Fund Directors' Forum on September 22, 2003


The playlet will take about 15 minutes and consists of dialog between an independent mutual fund director and his spouse. The following the action, there will be time for a question and answer period to amplify the discussion. A transcript of the playlet is available on www.mfgovern.com and may be copied or modified, with attribution, to raise awareness of current issues in the fund industry.

Do I really want to be a Mutual Fund Director?
A one act playlet about the convictions and doubts of a candidate for fund directorship

Cast of characters

Character #1: Richard Barclay, a 50-something corporate executive who has recently taken a retirement package from his corporate employer of 30 years. He has just been offered directorship of 30 funds with $30 billion in assets of the Seminar Family of Funds. Richard is active in political and charitable activities in his hometown. In addition to the mutual fund directorship, he has recently been elected a director of relatively small, but fast growing, public corporation.

Character #2: Janet Barclay, his wife of 25 years, is the national sales manager for a professional publishing firm. Janet has her MBA in Finance and is well acquainted with the workings of mutual funds. She is skeptical about her husband becoming a mutual fund director.

Screen

The action takes place in the back seat of the Barclay's car returning from a cocktail party where Richard has just been offered directorship in the Seminar Family of funds. Husband and wife are just beginning a conversation about the advantages and disadvantages of accepting the offer.

Time

The action takes place in late 2003, about a month since the New York State Attorney General, Eliott Spitzer, has uncovered extensive wrong-doing in the mutual fund industry. The legal complaint by New York State against NationsFunds and the Canary Capital Hedge Fund alleged extensive wrong doing by senior executives in the fund industry. At the time of the action, several leading figures in the fund industry have been indicted and a couple have already pleaded guilty to criminal charges.

Act 1

At curtain rise: As the playlet begins, a middle aged couple enters the stage one from the left and the other from the right. The family car, represented by two chairs, is set center stage between the entering couple.

Janet: (entering stage left with her husband. He opens the passenger side door for his wife) Hey, That's nice. You must be in a good mood

Richard: (opening the driver's side door and getting in) I am. Sidney Seminar just offered me a seat on his mutual fund board; quite flattering really.

Janet: That's great! Let's talk about it on the drive home.

Richard: I would love to. There are a couple of things that bother me. For example, I was surprised that Sidney offered me the position. I expected the actual invite to come from the Chairman of the Nominating Committee. I hope he doesn't think that he is doing me a favor. I know I have to represent the fund shareholders, no the shareholders of Seminar Management.

Janet: Yes, but don't make too much of it. They gave you plenty of information about your responsibilities and it was the Nominating Committee who found you in the first place. And you fully disclosed our loans from US Holding Bank, the owner of Seminar Management. To be honest I was surprised that those loans, which are pretty important to our investment properties, didn't disqualify you.

Richard: I won't let our normal commercial relationship with the parent company, interfere with my business judgment.

Janet: Well, I read somewhere about the three Es of the fund director job: effort, expertise and exposure. Let's talk about how you will fit in these three aspects.

Richard: In the effort category, I expect this job will take about 120 hours per year- about four weeks of meetings. There are five board meetings and probably two additional committee meetings. Most other committee meetings take place on the same day as Board meetings or on the night before, when the independent directors meet privately without Sidney or his staff. On top of that they tell me there is a lot of preparation time. In fact, one trustee showed me his briefing book which was two four inch binders. I tell you the staff of the public company, on whose board I serve, would not dare present such a jumble of undigested data. I wonder what happened to focus in mutual fund governance.

Janet: What about expertise. Look, you can't even balance our own checkbook, how do you think you will look after the savings of millions of Americans. You have never worked on Wall Street, does that matter?

Richard: No I don't think so. I do understand the economics of businesses and I can differentiate the wheat from the chaff. I have been reading the Eliott Spitzer complaint about Canary Capital. As a fund director, I will focus on the critical issue of where the fund assets come from and what those investors expect. I am confident that I can learn what I need to know pretty quickly.

Janet: OK, now let's talk about exposure. That is what worries me; I don't want to loose our house; nor do I want to be embarrassed in our home town. We have worked too hard for that. What kind of exposure will we have?

Richard: Well, there is obviously some legal exposure. Our lawyer tells me that there is little criminal exposure. That would only come from a deliberate act which was performed with criminal intent, which I do not intend to do.

Janet: Are you sure that there is nothing in Sarbanes-Oxley which could get you in trouble?

Richard: I am assured that there is not. At present, at least, mutual fund directors are not required to certify the fund's financial statements, like I had to do when I was CFO. I guess the only criminal exposure that could creep up on me is if I was unwittingly co-opted by the other Seminar directors or by Seminar management. But I intend to get to the bottom of everything I don't understand and if I have to I will vote against any resolution I don't think is in the shareholders' interest.

Janet: What about civil exposure? I just read that the Heartland Fund directors have been charged by the SEC.

Richard: That's true, but it seems they really did not pay attention to the valuation of portfolio securities for long periods of time. I suspect they just plain trusted management and their pricing service to correctly value securities. I will be polite and cordial, but I will be my own man.

Janet: What kind of complaints do the SEC make about directors?

Richard: Well I met with counsel to the independent directors of Seminar. He told me that improper procedure is the most frequent complaint, followed by conflicts of interest, failure to supervise, failure to safeguard fund assets, failure to be loyal, failure to act tin the best interests of the fund shareholders.

Janet: So much mumbo jumbo; what are the substantive issues the SEC goes after?

Richard: Improper trading activities, like the Canary Capital allegations. Valuation of assets, like Heartland. Best execution, improper use of soft dollars, improper accounting, misuse of fund assets, improper allocation of investment opportunities and capabilities.

Janet: I heard that mutual fund directors are indemnified by all the fund assets. But can you use fund assets to defend yourself?

Richard: The lawyer says that is a matter of Sate law so maybe yes, maybe no.

Janet: What about Directors and Officer's insurance?

Richard: We have that; and now that can not be cancelled without the independent directors knowing about it. Additionally the fund directors have coverage which allows for ìinsured versus insuredî coverage. In other words, if the directors have a row with Seminar Management, we are covered. The things I have to watch out for are insufficient coverage and policy exclusions.

Janet: Well that is a relief. What kind of things could the Plaintiff's bar sue you for?

Richard: The lawyer tells me that no fund directors have ever had to pay the Plaintiff's bar. Generally if the director exercises sound business judgment and demonstrates loyalty to the fund shareholders they can't be found liable.

The thing that bothers me is that I will be director of 30 funds and am exposed 30 times. In the public company, I am only exposed once.

Still I am glad that Seminary is a relatively large complex. They have good lawyers, experienced auditors and a top notch compliance department with proven procedures. I would think twice about being an independent director of one small fund, which could not afford the necessary resources.

Janet: Now we come the hardest bit. What about loss of reputation from bad or inaccurate press? You are a prominent, comparatively well-to-do citizen with multiple responsibilities in our community. Without this fund appointment you will get other opportunities with public companies and, who knows, you might even run for public office. If anything goes wrong with this mutual fund thing, you will lose all those opportunities. What kind of things, are the press likely to give you a hard time for?

Richard: The most likely thing is poor fund performance.

Janet: And you have no control over that! Sounds like trouble to me. What else?

Richard: Unsupportable fees, like a 12b-1 on funds which are closed to new investors. The press will say that there is no reason to market a fund which is closed. I am going to be really strict about reauthorizing the 12b-1 distribution each year.

Janet: What else could the press hang on you?

Richard: Controversial proxy votes; there was a scandal last year when a fund group suddenly changed its votes in favor of a merger when told to by its parent company. The proxies belong to the fund shareholders and I will do my best to see they are voted for their benefit, not the manager or its affiliates.

Janet: Anything else?

Richard: Well the press gets really upset when fund directors seem to make a lot of money for what they see as little effort. I will earn about $80,000 a year.

Janet: I should darn well hope so after all I have heard. So are you going to take this job? (Car drives up the driveway to their house).

Richard: Yes: the effort is manageable and reasonably paid. The expertise is learnable. The exposure to lawsuits is both indemnified and insured. The exposure to loss of reputation is serious, but on balance I can live with it. The deciding factor for me, is how important mutual funds are to America. They are the preferred savings method for 75 million Americans for good reason. Mutual funds a have relatively low cost, professional management and diversified risk. I will be proud to serve as a mutual fund director. (Actors exit the car and walk off stage together)

Playlet ends and question time begin....