The lead director in fund governance: without inflating the importance of the position or the person, here is some guidance on how the lead director can take the lead in enhancing board effectiveness.

• Author: Robbins, Larry M.

IT' S EASIER FOR A GROUP to do something when someone is in charge. The Investment Company Institute recognized this general managerial maxim when it published its "Best Practices" report for mutual fund directors in 1999. The report, entitled "Enhancing a Culture of Independence and Effectiveness," clearly states the reasons for funds to appoint a lead director:

A lead director can help to coordinate activities of the independent directors, such as by chairing separate meetings of the independent directors...and by raising and discussing issues with counsel. A lead director also may act as a spokesperson for the independent directors in between meetings of the board. From fund management's perspective, it can be useful to have a point of contact among the independent directors with whom management can discuss ideas informally.

To accomplish these tasks, lead directors need to review their responsibilities to shareholders, fellow directors and management, to prepare for and run meetings efficiently, to develop effective interpersonal skills, and to promote strategies for evaluation.

Functions of a lead director

What is a lead director? First, a definition. The distinction between a chairperson and a lead director may seem to be linguistically arbitrary. (Mutual fund board members typically are referred to as trustees" only when the fund is organized as a business trust; board members would be directors if the fund is organized as a corporation or possibly a limited liability company.) However, the concept of a chairperson connotes decisionmaking, while the key function of a lead director is to facilitate. Not that the two are mutually exclusive, but in fund governance independent trustees work as a team whose common goal is to represent shareholder interests. The lead director's role is to facilitate communication between management and the board so that decisionmaking can be shared.

Responsibilities of a lead director. As with all directors, the lead director represents the shareholders' interests by making sure that securities laws are observed, the finances of the fund are administered properly, and the service providers are executing their responsibilities satisfactorily. These are the external responsibilities, determined by law and regulation. The lead director's internal responsibilities require regular communication with fellow directors and with management. When the information flow wanes, the ability of independent directors to oversee efficient operation of the fund disappears.

Enabling people to share information does not necessarily translate into micromanaging. The lead director should make suggestions, not investments. The board must oversee the actions of the fund managers, advisors and subadvisors, but intruding into daily operations wastes the time of professionals. Perhaps the easiest way to distinguish between overseeing and managing is that the most important responsibility of the lead director is to ask, not tell.

Duties of a lead director. If laws and regulations establish the responsibilities of all directors, common sense and institutional culture determine the duties. As a designated contact, the lead director has access to all interested parties. The list is not long; in fact, external to the board, the lead director need only have regular contact with the fund manager, the fund administrator, and legal counsel. Internally, the list includes the disinterested directors and the interested directors. In a recent Lipper Analytical sample of 15 funds, whose assets range from $3 billion to $10 billion, the average number of directors is only seven (five disinterested, two interested). In larger funds with assets above $50 billion, the average is slightly higher (seven disinterested, two...