Advice for Potential Fund Directors
Written by C. Meyrick Payne, Partner, Management Practice Inc. (MPI)   
     In recent years our firm has searched for and placed numerous independent fund directors. The process has been enlightening. Perhaps because the responsibilities and dynamics of a fund director are so different from a corporate director that candidates can become confused over their specific role. In both the position and the interview process, individuals can inadvertently trespass on the operating responsibilities of the fund manager, perhaps improperly broadening their anticipated functions to include marketing and product strategy or perhaps failing to champion the interests of existing fund shareholders in favor of future investors. In every case, a director candidate should remember that he or she has a duty of loyalty to the present fund owner, to exercise their best business judgment and devote sufficient care and attention to the challenges they face.

     During the actual search process there are three additional topics of which the potential candidate should be mindful. These are described below.

1.    Remember the “T”

     Fund director searches today are often done by professional headhunters or at least with guidance from an experienced third party to ensure independence and rigor. A search will often start with an assessment of the skills and interests of the existing directors compared to the anticipated future needs for governing a mutual fund - effectively a gap analysis, which is used as a compass when searching for an additional member. Included in this process is the creation of the “diversity” requirement (in its broadest sense) which is included in the proxy. This generally relays the intent of the board structure to the public.

     As a result the search for independent fund directors is often based a “T” – broad, wise, collegiate and compatible on top with a special skill or interest, which when combined with those of the existing board members provides the capabilities needed to govern the fund family.

     The skill set sought by a particular board will vary and the most sought-after specialties have changed over time. Twenty years ago, lawyers were heavily in demand; when Sarbanes-Oxley required an audit committee financial expert on every board, accountants took top position, then compliance or operational expertise when fund boards were required to have Chief Compliance Officers report directly to them.  Today, because of increasing product complexity investment expertise is pursued.

2.    End Every Sentence with a Question Mark

     A sitting board is often comfortable with its established way of doing business and, while welcoming a new member, it is appropriate for a candidate, especially one who is very experienced in the mutual fund business to avoid aggressive, declarative statements, and advocating a particular point of view when all the facts are not yet clear.

     Furthermore the role of a mutual fund board is more akin to asking probing questions rather than giving directions. An existing board will be very conscious of the danger of micro-management rather than good governance. A candidate who appears to be more comfortable with declarative statements, rather than perceptive questions may cause consternation. In general, question marks are for directors; exclamation points are for executives.

3.    Have you truly “crossed over”?

     The mindset of a director is different than that of an executive. A board interviewing a candidate will often asked themselves “has this candidate crossed over?” meaning has this person fully appreciated that their responsibility is to dedicate their time and efforts to looking after the investor.

     A difficult event for a fund board is to add a new member who decides after a short period to return to a conflicting role, be it because of time dedication, position responsibilities or location for example. From the candidate’s point of view, he or she has to be confident they are decided to leave behind any conflict of interests, and accompanying pay check, and to champion the fund investor.

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     Seeking to be a fund director is similar to any other search. One difference is that there is a stronger emphasis on character compatibility in addition to skill. The trick is to think, not about how you see yourself, but rather how the sitting board sees you. Look through their eyes and remember their sensitivities and reservations about having a new director join them for what is hopefully a long standing relationship.