Will independence really matter? For mutual fund boards, the SEC should be focused on the drivers of shareholder value.

• Author: Coates, Frank
• Position: COMPETITIVE EDGE

SINCE 2004, when it passed a rule that that all mutual funds appoint independent chairmen and a 75 percent independent board, the SEC has waged a battle with the fiercely oppositional U.S. Chamber of Commerce. To date, the rule has been rejected twice by a federal appeals court, which faulted the SEC's administrative processes. The issue of independent board chairman has grabbed the attention of the industry and the regulators.

The question I ask is, "Will independence matter?" First let's review the basic arguments.

Ostensibly, what the SEC wants to accomplish is effective governance to protect mutual fund investors. Two reports prepared by the Office of Economic Analysis and released by the SEC in December 2006 looked at the costs and benefits of having a chairman and 75 percent of the directors on a mutual fund's board independent from the investment adviser. These reports did nothing to settle the issue--in fact, it appears both sides have used the reports to support their argument.

The debate is firmly divided. Some say that the studies strengthen the case for independent directors by recognizing that there are numerous conflicts between the interests of a fund manager and those of fund shareholders. The Mutual Fund Directors Forum, an organization of investment company independent directors, commented that "Independent fund boards are ... ideally positioned to oversee and, if necessary, manage the resolution of these conflicts."

Opposition to the rule is equally prevalent. The Independent Directors Council, part of fund industry trade group Investment Company Institute, advocated that directors should be left to choose whether they want an independent chairman or not, based on the evidence (or lack of evidence) in the reports.

Both sides of the argument have merit. And, in general, mutual fund investors don't give a hoot about the independence of the chairperson. They just want a board that will protect and assist in the growth of the fund assets.

If the goal of the SEC is to make sure mutual funds better serve their shareholders, it should focus on the drivers of shareholder value--not the structure of the board.

The industry should focus on board effectiveness over board independence. Likewise, the SEC should instead focus on helping boards be more effective, not on board chairman independence.

In general, the SEC likes to see boards define their governance "system"--thereby putting a tremendous value on the skill and effective...