Industry Critics Side With Buffett in Berating Fund Directors

A number of critics of the U.S. mutual fund industry said Monday that they agree with billionaire investor Warren Buffett’s assessment that “zombie-like” fund directors have fallen down on the job.

“He is right on target,” said Roy Weitz, an industry watchdog who runs the Web site FundAlarm.com. “Very few people are willing to come out and say what he did, that the role of fund directors is to find the best manager and negotiate the best fee.”

Mutual fund directors, who oversee a fund’s operations and management, are expected to function as watchdogs who look out for the best interests of fund shareholders.

But Buffett -- echoing Vanguard Group founder John Bogle and others who have called for industry reforms -- berated fund directors in his closely watched annual shareholder letter, saying they were ignoring their duties to find the best possible managers for funds and failing to negotiate the lowest possible management fees.

Fund directors make decisions “in a zombie-like process that makes a mockery of stewardship,” Buffett charged in his letter to shareholders of his Berkshire Hathaway Inc. holding company. The letter was published on Saturday.

“A monkey will type out a Shakespeare play before an ‘independent’ mutual fund director will suggest that his fund look at other managers, even if the incumbent manager has persistently delivered substandard performance,” Buffett wrote.

An industry trade group that represents fund firms, however, took issue with Buffett’s comments. It said that fund boards of directors are indeed looking out for shareholders’ interests and their performance should not be judged by how often they change a fund’s portfolio manager.

“The gauge of a board’s effectiveness is not how often it changes advisors,” said Chris Wloszczyna, a spokesman for the Investment Company Institute. “The board is not there to shop the fund every year when the contract expires.”

Instead, Wloszczyna said, “the primary responsibility of fund directors is to oversee the operations of the fund, to make sure that it is operated in the best interests of shareholders and to guard against conflicts of interest between the fund and its advisors.”

Buffett’s criticism comes as investors are reeling from declines in their stock funds after three years of losses. An estimated 95 million people are invested in U.S. mutual funds.

At least 50% of directors on a fund’s board are required to be independent. But boards still are too passive, allowing mediocre managers to stay put when they should be fired and permitting fund firms to raise management fees and make funds costlier when increases are not justified, said Russel Kinnel, director of fund analysis at research firm Morningstar Inc.

“They are supposed to be able to hire and fire managers, yet they never use that discretion,” Kinnel said. “They sign off on [fund] mergers that are in the fund companies’ interests, but not shareholders.’ ”