Being a Fund Director is All About the Question Mark - January 2013
Written by C. Meyrick Payne and Jay Keeshan of Management Practice Inc. (MPI)   

     At many board meetings, the question "What is the difference between good governance and micromanagement?" often arises. The answer is never very satisfactory and goes something like "We know it when we see it". The purpose of this bulletin is to explore this sensitive subject, and it often involves the directors’ intent and approach when working with management.

chair_conference.png     Generally the responsibility of the board is to question and encourage management, avoid unnecessary and undisclosed risks, and ensure a process for complying with the securities laws and regulations. To create a cohesive and productive relationship between management and the board, fund directors often approach subject matter inquisitively and end a sentence with a question mark.

     The responsibility of the management team is to form company strategy and execute daily operations, and inform the board of pertinent information regarding these operations. This often involves giving instructions, being clear about what is expected, and holding people accountable.

Impact on Fellow Board Members

     Board members who are too directive or certain of themselves tend to truncate the deliberative process, harming the collegiate atmosphere and overshadowing the opinions of others. This tendency is sometimes reported in the annual self-evaluation process, however this process may not be clear enough for the offending party to get the message, leading to even more frustration. Ideally the board chair will understand the issue and bring the disruption to the offending director's attention.

Impact on Executive Management

     If the impact of this behavior on fellow members of the board is dysfunctional, it is even worse on the executives who are accountable to the board.  A board that is too directive is in danger of assuming responsibilities which appropriately belong to management.

     Some ’40 Act attorneys believe that a board which is too action-orientated may even find themselves legally accountable for their over-zealous declarative statements.

     A board which does not give management sufficient time or resources to explain their decisions is in danger of never truly understanding what is going on. This is sometimes the case with derivative securities or alternative investment strategies.  These are necessarily complex and are only understood if those who do understand them are given sufficient opportunity to explain what is happening. Question marks elicit a considered response; exclamation points tend to terminate discussion. Exclamation points are usually indicative of directives, sarcasm, or frustration. When used by fund directors they can lead to ill feelings, resentment and stubbornness on the part of management.

Impact on Service Providers

     Mutual funds typically have no employees but rather rely on multiple service providers to handle everything, including portfolio management, transfer agency, fund accounting, custodial services, and much more.  These providers are coordinated by the management company and are ultimately accountable to the board.  The role of the board is to ask questions and set a professional tone with the service provider, but not to manage them directly.

Impact on Fund Board Candidates

     When a candidate for a vacant board position interviews with the existing members, the impact of the question mark (compared to the exclamation point) is particularly noticeable. Serving directors are wary of a board candidate who seems to be authoritative rather than collegiate. A sitting board is typically nervous that a new director will destroy the current cooperative atmosphere or might take the board away from governance into micromanagement. This fear is particularly pronounced when the candidate has recently retired from a senior executive position, especially at another management company.

Impact on New Directors

     As an existing board becomes acquainted with a new member, sensitivity to new input and influences can be acute. Although every board member is expected to make their thoughts known, a new director may be well advised to listen and observe for the first few meetings. Topics may have been recently discussed at an earlier time or be scheduled for a later meeting. Understanding how a sensitive subject is typically discussed between the adviser and the board is useful knowledge before jumping in.


     Everyone wants a fund board to work smoothly and efficiently, but a board is, at its core, a collection of individuals with opinions and sensitivities. A question, albeit sometimes targeted and direct, is typically a more productive way to approach a sensitive issue than a declarative statement.