Composition of Mutual Fund Boards Print E-mail
Written by C. Meyrick Payne   
(These findings are based on the experience and data collected by Management Practice Inc.).

With the continued growth in the number of mutual funds and, perhaps more importantly the anticipated retirement of many mutual fund directors, the issue of mutual fund board composition continually crops up. Whether the purpose is to select a new director or to evaluate an established director, the need for criteria is all-important. Naturally each board has to consider its own needs, gaps in existing skills and objectives. Nevertheless our firm's view of the current composition of mutual fund board and some comments about the skills or experiences which may be lacking are useful starting points for an evaluation of mutual fund governance.

 

Characteristic

Application to Fund Boards

Comment
Age Average age is 62, down from 63 one year ago. Average age of newly appointed director is 52 with typical retirement at age 72. Independent directors are older than interested directors; of the 2,500 independent directors about 30% have or will reach age 72 in next three years. As a result there may be as many as 750 new directors elected.

About 75% of all new funds flow into mutual funds comes from investors aged 50 or less; whereas 60% of the aggregate amount of mutual fund investments are owned by investors aged older than 50. Increasing discomfort with age as a retirement criteria; discussion if term limits is better.

 
Sex Only 9% of Mutual Fund directors are women and the majority of these are interested in that they work for the Management company. 60% of all mutual funds are estimated to be owned by women; 45% of all new funds flow come from women; women play a decisive role in the allocation of family investments 52% of the time.
Race Less than 1% of the mutual fund directors are from minority groups. In the 401(k) market 11% of the new funds flow is estimated to come from minorities.

Relationship to Management Company

 48% of mutual fund directors are interested in that they currently work for the management company. 17% of directors used to work for the same management company but have since retired; about 10% of the independent directors used to work for the management company but have been retired for 2 or more years. Historically retiring executives of the Management Company were thought to be logical candidates for the mutual fund board. Sometimes retiring directors from the management company board were nominated to the mutual fund boards.

Primary Profession

 65% of all mutual fund board members have an investment background; 20% are Investment Company Act lawyers; 10% are academics and 2% are former political or public figures; 8% are former business executives with a general background. The status quo is more likely to be preserved by those who prospered under the current system of governance. Academics tend to be analytical; business executives tend to b intuitive. Executives from other industries tend to demand plain English.

Director's fees as a percent of total income and/or wealth

 Our firm's experience is that mutual fund directors tend to be accomplished professional or business executives who have enjoyed meaningful and well-rounded careers. As a consequence they have substantial incomes if still employed in their primary profession; if retired, they often have second professions or sizable retirement benefits. As a rule of thumb their mutual fund director fees comprise no more than 20% of their total income is still working in their primary profession and no more than 10% annually of their accumulated net worth if retired. Much has been written about the purported lack of independence of mutual fund directors when they serve as directors of multiple funds. We have not found this to be the case because their primary motivation as accomplished professionals is to represent the interest of the shareholders. Furthermore the fees, while certainly meaningful, are not a determining factor in their lifestyle. Only in a few Social Responsible funds have we found directors to whom the directors' fees make up a substantial portion of their overall income.

Investment in Mutual Funds governed

In our firm's annual surveys we have found that directors own shares in some of the funds within the complex or fund family about 54% of the time. Only rarely do the own shares in every fund they govern because of the great number and variety of funds within a complex. When they do not, investors often write scathing letter wondering how the directors can look out for their interests which the directors do not share. When the problem of directors not owning shares in public corporations became evident in the 1970s and 1980s, a practice evolved under which directors were given options or, in some cases, granted outright awards of shares. Since this is impractical in mutual funds, an alternative of allowing directors to defer part of their current compensation in shares of the funds governed evolved.

These characteristics may not be all inclusive for any particular fund family and the specific criteria for each will naturally differ, but this list is intended to provide a starting point in the discussion of performance evaluation or new candidate selection.
 
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