Evaluating Board and Trustee Performance
Written by C. Meyrick Payne   

Guidance to trustees about how to comply with the SEC's new requirement that Mutual Fund directors annually evaluate the board's performance. This SEC requirement follows an earlier ICI recommended “best practice”.

Mutual fund trustee performance can be divided in two parts: (1) for the board as a whole and (2) for individual trustees. Some suggested criteria for the evaluation of each is provided in the paragraphs which follow.

For the Board as a Whole

For the board as a whole, performance of trustees should be measured in terms which are meaningful to the underlying investors, such as:

  • Investment Performance. While the directors are not personally accountable for investment performance it would be foolhardy not to take it into account. On the other hand, it would be equally unwise to pay the directors a bonus, or suffer a reduction in compensation, as a result of performance. The directors are on watch come rain or shine. Indeed some of their most difficult decisions may come when fund performance far exceeds expectations; perhaps, because the manager is taking unexpected risks.
  • Expense and management fee control. Oversight of the fund expenses is certainly a key component of a board's responsibility. Of particular import is the management fee which the independent directors negotiate on behalf of the shareholders. For virtually every other expense, the management company shares a common interest with the shareholders in holding the fees down.
  • Compliance and internal control. The directors are responsible for ensuring that the management company corrects any compliance problems. An evaluation of the trustees' performance should include a review to see that all of the items raised by the SEC, the Chief Compliance Officer, and the internal or independent auditors have been corrected or explained.
  • Best governance practices. For many years trustees had little idea of how other boards compared in terms of governance practice. MPI, the ICI, the Mutual Fund Directors Forum (MFDF), Fund Directions and BoardIQ newsletters, and most of the Big Four accounting firms now publish papers about governance practices. An evaluation of performance might well include benchmarking how a fund’s governance and compliance practices compare to the ICI's "best governance" practices. 

For the Individual Trustee

A more complicated and sensitive issue is the assessment of individual trustees. It is complicated because the process involves differentiating one trustee from another and sensitive because the process of differentiating one trustee from another may erode the mutual trust that is necessary for a board to work cohesively. Many boards avoid these contentious issues by having the trustees evaluate themselves. These self-evaluations are then submitted to an independent party, such as counsel for summary. Now that there will be an independent Chairperson, these evaluations are likely to go to him or her.

The criteria for evaluating individual trustees may be divided into four parts:

  1. Building Mutual Trust. This includes all of the personal attributes that pertain to a supportive atmosphere such as attendance, being prepared, active participation, and avoidance of self-aggrandizement, personal commitment and core competencies.
  2. Diligently Pursuing Responsibilities. This is particularly important relative to contract renewal, election of new trustees, and safeguarding fund assets. The active negotiation of the annual management contract may well be the best measure of collective performance. The role that individual trustees play in this process may provide the best indicator of personal performance.
  3. Fostering an Open Environment. Mutual fund trustees, like corporate directors, need to encourage an environment of frank and wide-ranging discussion while avoiding the trap of micromanaging or interference. The performance of individual trustees may be assessed by reference to his/her participation in the setting of the board agenda, by availability to meet with management company personnel and by public persona.
  4. Acting with Genuine Independence. When each director asks him or herself such a series of questions designed to probe their independence, the process demonstrates that he or she acted in the long term interests of the shareholders. Many mutual fund directors find that their prolonged exposure to management company executives, especially when combined with a virtual absence of face-to-face contact with fund shareholders necessitates a sustained effort to avoid being co-opted to the management company's point of view.

Setting criteria and collecting data are the easiest parts of a trustee evaluation process; the communication of results is more challenging and the implementation of corrective action requires the utmost sensitivity - especially if one of the trustees is not living up to the standard of care which the shareholders expect.