Directing mutual funds: drama without tragedy; How a mutual fund board can garner 'two thumbs up' for its performance.

Author:Thomas, Frank

'LIGHTS! CAMERA! ACTION!" These are not the traditional sounds heard in the mutual fund boardroom. Yet spotlights focused on the industry during the past year have revealed heroes and villains in venues far from Broadway or Hollywood. And the audience--the many Americans who invest in mutual funds--is not amused. They are looking for directors who will assure them that there will be no sequels to the recent scandals.

How does a mutual fund board garner "two thumbs up" for its performance? Every production, whether theatrical or corporate, is shaped by the character of its directors. Regardless of venue, the "best director" awards usually go to those who display curiousity and integrity. In that sense, the role of a mutual fund director is the same as a director of any for-profit enterprise.

These are my "director's notes." In reflecting on how to play the role, I've focused on commonsense elements of leadership with integrity. I've also relied upon my extensive experience as a litigator and adviser on matters of risk management and regulatory compliance. My notes include much that is obvious. Yet events have shown that there is always a need for retelling the story.

  1. It's not your money

    The Romans gave us the concept of "fiduciary," one of those good, old-fashioned words whose meaning sometimes seems lost in antiquity. As Black's Law Dictionary explains, it's a person who undertakes a duty "to act for someone else's benefit, while subordinating one's personal interests." In the relationship between director and investor, the investor's interests are paramount. That principle must inform all decisions made in the boardroom.

  2. It's not just money

    For some time now, mutual funds have been a way for Americans to share in the prosperity of the nation without undue risk. Whether through individual accounts or as beneficiaries of pension trusts, we place our future in the hands of professional fund managers. It is purposeful investment--money for a new home, for children's educations, for retirement. Directors should understand that they oversee a business whose core "mission" is helping individuals achieve family-oriented goals and helping them to be self-sufficient financially throughout their retirement years.

  3. A good show requires a good cast

    A director's most important task is to help foster a culture of integrity within the organization. Cultures cannot be scripted--they're not created by mission statements or personnel manuals. Integrity is personal; it can be institutionalized only by leaders who believe strongly in responsible business conduct and who communicate that belief effectively and continually throughout the organization.

    How can a director encourage a culture of integrity? A good place to start is by getting to know the CEO and other senior executives well enough to understand their ethical perspective on sensitive business matters and to be able to speak candidly with them about such matters. Also, corporate officers need to know that the board will support managerial decisions that reflect a commitment to responsible conduct, even if those decisions adversely affect short-term financials. Keep in mind that a lack of integrity inevitably leads to your show's cancellation: The spectacular corporate implosions of the past decade are traceable to irresponsible actions designed to inflate the numbers or to enrich "players" at the expense of the investing public.

    Observe how key personnel interact with one another and with staff, and encourage people-sensitive management styles. In the long term, businesses succeed by recruiting and retaining managers who convey a positive attitude, treat employees with respect, and share the credit for good performance. A culture of integrity is sustained through the dedication and goodwill of a company's workforce. Such dedication and goodwill develop in places where success is understood as a team...

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