Rising expectations of fund directors: mutual fund boards can take the lead in improving fund governance by ensuring that the board is truly independent and qualified, and by increasing the transparency of the nominating process.

AuthorDaum, Julie H.
PositionSPENCER STUART GOVERNANCE LETTER

A PROFOUND CHANGE in the way mutual fund governance is viewed is rippling through the industry, set off by revelations of abuses involving market-timing and late-trading, as well as by greater awareness of the sometimes high undisclosed costs borne by shareholders.

Much like the corporate scandals that led to the passage of the Sarbanes-Oxley Act and the creation of a slew of new requirements by the Securities and Exchange Commission (SEC) and the stock exchanges, these revelations have provoked outrage and stoked a groundswell of calls for mutual fund governance reform. Industry critics call the abuses a betrayal of trust and fiduciary responsibility and accuse mutual fund boards of displaying a tameness toward management exceeding even that of corporate boards. Only a dramatic change in the culture of the industry and a meaningful improvement in the effectiveness and independence of mutual fund boards, they say, will halt abuses and rein in fees.

In short, mutual fund boards have been put on notice. They now face an unprecedented degree of scrutiny from regulators, legislators, and investors, who are demanding that mutual fund boards become more involved and more accountable. Increasingly, boards are expected to ask more questions, have resources to independently measure the performance of the management company, and challenge fund management when it raises proposals that might run counter to the best interests of shareholders.

SEC Chairman William H. Donaldson underscored the new expectations of fund boards, and independent directors in particular, during a January 2004 Mutual Fund Directors Forum: "You are the investors' first line of defense in ensuring that their interests are being served, that conflicts of interest are appropriately managed and disclosed, and that investors' money is being managed responsibly. While the SEC shares this mission to protect investors, we cannot be in the boardroom when investors' interests may be compromised. Investors are depending on you to stand up for them."

Some independent directors may feel uncomfortable with this growing set of expectations and new level of accountability. But with the forces for reform now in motion, independent directors can and should seize the opportunity to improve governance, pushing the board to become more independent and effective as a result.

Renewed focus

Mutual funds have become a primary investment vehicle for millions of American families, especially for...

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