Age, Term or No Limits for Mutual Fund Trustees
Written by C. Meyrick Payne   

Being a mutual fund director is a uniquely influential position and it can be quite rewarding - both monetarily and psychologically. Once someone has become one, especially of a large fund complex, there are few mechanisms by which he or she can be displaced. The purpose of this MPI Bulletin is to explore the advantages and disadvantages of age, term or no limits on the length of service.

There are about 3,000 independent mutual fund trustees in the United States today overseeing about $7 trillion in mutual fund assets. Compare that statistic with 600,000 doctors and 800,000 lawyers and 700,000 CPAs. And of those, about 700 oversee 80% of all fund assets. Undeniably fund trustees are influential and perhaps even pivotal in the savings and investment process in America today.

The compensation of fund directors pales in comparison to the salaries of portfolio managers and investment managers, whom they are paid to oversee. Nonetheless some fund directors meet only four times per year; with the substantial time required to prepare and discuss topics among themselves and with expert advisors prior to the Board or Committee meetings, their compensation can still average over $500 per hour. While this is no more than the rates charged by the top í40 Act lawyers and accountants, it is a tidy sum to receive personally.

The compensation is all the more attractive because it comes at a time and place in life when many fund directors have retired from their primary profession. So while the absolute pay is often reasonable for the responsibilities carried, it does represent a sizable proportion of overall disposable income

The value of fund director compensation stems from its longevity rather than its rate. The average age of a mutual fund director is 62, the average of a new director is 52 and the average retirement age is 72. Twenty years of trustee compensation is nice to have when other earned income is typically declining.

In addition, being a fund trustee is typically interesting and rewarding work. Trustees are treated well and are close to stimulating and vibrant topics. As a result, mutual fund directors are not inclined to resign of their own volition. So the question becomes, should the Board voluntarily adopt a service limit.

The Merits of Limits

Twenty years ago, few complexes had any limits. Partly because there was little or no interest and the compensation was relatively low. Nowadays, corporate and fund governance are much more publicly scrutinized. Indeed the compensation of fund directors is better disclosed and more actively analyzed than that of portfolio managers. As a result, the financial media keeps a close eye on governance and the investing public wants to know what value it is getting for its dollars.

The advantage of no preset limit on service is that this policy allows the most experienced people to continue for a long time. The disadvantage is that the director may become stale, become co-opted by management company they are paid to oversee, or become too dependent on the income stream as they age. Advocates of the no-limit option argue that each case can be decided on its own merits. Indeed there are many octogenarians who not only have all their marbles, but also forcibly debate with some young entrepreneur.

The advantage of age limits is that it provides an arbitrary, but uniform standard by which to reinvigorate the Board. The mandatory retirement at, say, 72 almost always leads to the appointment of a younger person with a fresh set of ideas and skills. As the fund business, like any other, depends on innovation and creativity for survival, this churn is almost always beneficial. Of course, should there be some extenuating circumstance, such as the change in control of the fund investment advisor, a particular director can be exempted for a year or two.

The advantage of term limits is subtler. Like many other influential positions, there has been a tendency for fund directors to be white, professional men. The buyers of mutual funds are increasingly drawn from all races, demographics and creeds. This is especially true as the market for mutual funds is increasingly dependent on 401k retirement and college savings plans. As a result, our firm finds that qualified women and minorities are much sought after as candidates for open board positions. These candidates tend to be younger than the historical pattern of the 52-year-old white male.

Indeed an increasing number of new board members are in their 40s, sometimes academics or fast track executives. A new fund trustee appointed at aged 42 may well have 30 years of service, which is of course, much longer than almost any executive of the investment manager. As a result the very vitality, which their appointment was supposed to introduce, becomes suspect. The objective of bringing diversity to the Board may well indicate the need to set reasonable term limits. Very few complexes have adopted term limits at present, and few serving directors are likely to embrace them for themselves. Where they discussed, the term is often at 12 years, which is long enough to ensure an experienced cadre of senior directors and short enough to institutionalize vitality. When a new director is appointed there is a short window of opportunity to adopt term limits.

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