Directors Are a Solid but Non-Diverse Group

Help wanted: Mutual fund company seeks individuals to sit on board of directors. Good pay, part-time hours. Little interaction with shareholders required. Captains of industry, former politicians or academicians preferred.

If you’ve ever wondered what type of people control the nation’s 3,400 mutual funds, the preceding description should give you an idea. Like other corporations, mutual funds are legally owned by their investors. But you would be hard-pressed to find a regular shareholder, a little guy, in the director ranks.

Along with strict government regulation and other factors, directors play an important role in keeping the mutual fund industry as clean as it is. They oversee the investment management company, the marketing group, the custodian firm, the accountants and others who run funds on a daily basis.

They can fire any of these groups if they want--although that’s rare--and they have a voice in major policy decisions, such as determining how much in fees the fund should charge shareholders.

The industry has remained free of scandals for years, and the directors deserve much of the credit.

“They take their jobs as investor representatives very seriously, and they make sure the management company can deliver the products and service,” says Eric Borgen, chairman of Founders Asset Management in Denver.

Others express similar sentiments. “The industry has been able to weather huge growth . . . yet few investors have lost money through any omission of responsibilities,” says Geoff Bobroff, senior vice president in the Denver office of Lipper Analytical Services, which publishes data that board members use to evaluate their funds’ management.

The people who become directors (or trustees, if the fund is organized as a trust) tend to have previous management or leadership experience. Many are current or former corporate chairmen, and there are plenty of college presidents and professors.

Former presidents Gerald Ford and Richard Nixon served on the boards of the IDS Mutual Fund Group, and 1984 presidential nominee Walter Mondale sits on the boards of the Prudential Funds.

Others with current or past experience include former Secretary of Defense Melvin Laird (IDS); retired Gen. John Vessey, the former chairman of the Joint Chiefs of Staff (AAL Mutual Funds), and Dr. Jonas Salk, who developed the polio vaccine (the Dreyfus Group).

Muriel Humphrey, widow of 1968 presidential contender Hubert Humphrey, sat on IDS boards during the 1980s, and Beryl Bentsen, wife of Sen. Lloyd Bentsen (D-Tex.), serves on boards of Transamerica Funds.

The management company also has representatives on each board. However, the Securities and Exchange Commission requires that a majority of independent directors must vote in favor of certain measures in order for them to pass--such as whether to renew the management company’s contract.

Independent directors, sometimes with the help of management, recruit new members as vacancies arise. Shareholders approve the choices in proxy balloting.

Many fund companies tend to recruit board members from the local area to minimize travel expenses, which along with other board costs are borne by shareholders.

The same group of perhaps five to 11 board members will typically oversee all the portfolios in a fund family, meeting from four to 12 times a year.

Excluding travel costs and other reimbursable expenses, independent directors earn anywhere from $1,000 to $10,000 per fund each year, plus $50 to $500 per meeting attended, estimates Fund Directions, a New York-based newsletter for board members. Bobroff figures that most directors earn $10,000 to $25,000 annually.

The independent trustees at Fidelity Investments, who earned about $150,000 each in 1991, may be near the high end of the pay scale. They also supervise the largest number of mutual funds--more than 130.

Because independent board members can be held financially liable for derelict decisions if disgruntled investors brought suit, they have ample reason to work in the interests of shareholders. The directors have their own attorney, paid by shareholders, to help them sort through issues.

Considering that board members tend to have similar professional and socioeconomic backgrounds as the managers they supervise, it makes you wonder if there isn’t a little cronyism going on.

“In many cases, these are ‘good old boy’ networks,” says Don Phillips, publisher of Morningstar Mutual Funds, a Chicago research report. “Some boards are not truly independent, and members may be friends and associates of the management company.”

John Bogle, chairman of Vanguard Group in Valley Forge, Pa., believes that most directors do a “very poor job” of sticking up for shareholders. But he doesn’t know if a more diverse group of board members would help or whether shareholders would be more comfortable with less-recognizable names.

It’s hard to tell which directors work hardest for shareholders because so much board business is conducted behind closed doors.

Yet boards that sanction higher fees for management might not have the interests of investors at heart, Phillips suggests. Fund companies earn money based on the percentage of assets they manage, and as long as assets rise--which has been the trend in recent years--there should be no need to hike the per-share fee, he says.

Yet per-share expenses have crept higher in recent years, even as mutual fund assets have ballooned. “Shareholders haven’t participated in the industry’s economies of scale whatsoever,” Phillips says.

And for this, critics say, the boards that govern mutual funds must accept some responsibility.

Why Mutual Funds Don’t Fail Mutual fund investors can lose money if the stock or bond markets move against them, but it’s unlikely they will be victimized by outright fraud or bankruptcy. Several regulations and practices are designed to prevent major scandals in the business. Here are the main safeguards:

* Funds must be supervised by an independent board of directors or trustees, who can fire the investment management company or affiliated parties if necessary.

* The fund’s assets--stocks, bonds or cash--must be held by a third-party custodian, typically a bank. The portfolio manager has authority to buy or sell only on behalf of shareholders.

* The management company and affiliated parties are prohibited from engaging in certain transactions that might present a conflict of interest.

* The fund’s investment holdings are “marked to market” or appraised every day, and the fund’s current price--reflecting the per-share value of those holdings--is listed in newspapers. This makes it hard for the management company to hide problems.

* Funds must stand ready to redeem shares upon demand.