Trustee Compensation Growth Slows; Specialized Expertise Still in Demand - April 2008 Print E-mail
Written by C. Meyrick Payne and Jay Keeshan   

Management Practice Inc. (MPI) has just completed its fifteenth annual Survey of Mutual Fund Director Compensation and Governance Practices, with data covering 2,158 directors from 406 fund families. Copies of, and specific comparisons to, the survey detail are available.

Year over year "same director" compensation increased an average of 7.3% last year, a slower growth rate after more than five years of double digit increases since the passage of Sarbanes-Oxley and the fund scandals at the start of the decade.

However, this statistic masks the real story which is that the need for specialized, knowledge-specific fund directors has driven overall compensation to record levels. The premium for audit committee financial experts, the depth of knowledge required of compliance committee chairs, and the securities expertise needed to serve as chair of the investment or performance committee have all driven the cost of independent directors higher.

We have come to call this phenomenon the "T" shaped fund director because he or she must have the basic business judgment to fulfill their general responsibilities (the top of the "T"), along with a deep tail to fill the increasing need for specialized expertise.  This has been a driver for additional and higher chair fees for various committees.  In addition, the premium typically paid to the independent chair (or lead independent director) has also increased overall pay. 

The annual median compensation for trustees in the largest families (>$100 billion in assets) rose to $194,500. A summary of the major findings follows:

Median 2007 Fund Director Compensation Based on Assets

$.3 bil to $1.00 bil $1 bil to $3 billion $3 bil to $9 billion $9 bil to $25 billion $25 bil to $100 bill >$100 billion
$19,000 $26,000 $49,500 $77,942 $152,500 $194,500

The range of compensation within each grouping was wide, with the 90th percentile often four to five times the level of the 10th percentile. There were considerable economies of scale in the cost of fund trustees. In the smallest fund families the cost of a single trustee averaged $36.67 per $1 million of assets, whereas for the largest complexes the equivalent cost was $1.80. The cost per fund per trustee rose again this year to $2,664, the sixth straight year of increase since the passage of Sarbanes-Oxley in 2002.
 MPI's survey found that 83% of all fund board members are independent and that 95% of fund boards already comply with the SEC's proposed "super-majority" rule. The survey also found that the chairman of the board was independent 68% of the time, up from 60% last year.  The SEC rule mandating an independent chair appears to have been dropped from the SEC's agenda, however many boards have adopted one anyway.

 The survey notes that 78% of complexes reported having a mandatory retirement age.  While 72 was the age most frequently cited, there is a trend among some boards toward extending the tenure of experienced trustees.  This is believed to be beneficial to shareholders given the long term perspective and familiarity with the fund held by many long term trustees-particularly in times of market turbulence.

 Other findings included a shift to a flat fee by a number of boards.  The directors of these boards appear to have recognized their jobs as a continuous flow of effort throughout the year, rather than a series of periodic meetings.  They are removing meeting fees and setting their pay to include all board activity.  The omnipresent nature of the job may also be reflected in the steadily dropping percentage of directors who serve more than one complex, which is down significantly in the past few years.

  The survey notes that the mutual fund industry is highly concentrated, with 25 complexes controlling about 60% of all fund assets. These 25 complexes have about 230 trustees. On average, each of these large complex trustees oversees about $32 billion worth of invested assets. This is in stark comparison to the level of economic influence of the typical NYSE corporate director who, on average, oversees about $1 billion in market capitalization.

Finally, the MPI survey addresses the value represented by mutual fund directors. For the shareholders of the largest fund families, the average cost of all independent trustees to safeguard $1 million in assets was $14.23 per year, a tiny fraction of the cost of electronically monitoring a $1 million home.   This also compares to total fund expenses of about $10,000 for the same $1 million (assuming a typical 1% expense ratio).  Furthermore, the U.S. system of independent fund governance appears to play role in sustaining much lower expense ratios than those found in other developed countries. For example the UK, which does not have independent directors to look out for fees and expenses, the average expense ratio is approximately 75% higher.

Management Practice Inc. is a specialized consulting firm based in Stamford, CT providing governance, economic and business advice to mutual fund boards. More information is available at www.MFGovern.com or from C. Meyrick Payne or Jay Keeshan at (203) 973-0535 or email This e-mail address is being protected from spam bots, you need JavaScript enabled to view it

 
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