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Fund Boards Go 'Diligently' Digital

Diligent Board Member Services, a small but targeted software company based in Manhattan's Silicon Alley and traded on the New Zealand Exchange, has developed software that allows mutual fund trustees to be nearly hands-, but certainly completely, paper-free.

The 10 pounds or more of quarterly and annual binder reports that mutual fund directors lug around with them, are transferred on the Diligent platform to what the company's CEO Alex Sodi calls a virtual "encyclopedia."

That's how extensive the board reports, including all of the directors' and committee chairmen's notes, can be.

"It has changed my life as a director-to have the capability to not [have to] drag four feet of material to a board meeting and review it," said SunAmerica Mutual Funds Chairman Samuel Eisenstat. "This is cutting-edge technology that enables board members to more efficiently and effectively fulfill their responsibilities.

"I would urge members of the boards to test this technology," added Eisenstat.

SunAmerica, in fact, was the impetus for Sodi's team to write the software in the first place, in response to the client's 2002 request. In fact, Diligent is an outgrowth of ManCreative Partners, as in Manhattan, a custom web application company Sodi started during the dot-com days. When the SunAmerica request came in, the Diligent team soon realized SunAmerica was onto something big.

Since then, Sodi says, mutual funds have actually become the leading industry in a global movement to digitize the boardroom.

Other fund giants, 40 and counting, have joined the SunAmerica bandwagon, including Allianz Global, John Hancock, Northern Trust, OppenheimerFunds and The Hartford.

Asked why mutual funds, of all industries, are leading this movement, Sodi explains: "Mutual funds have significantly more board materials than other industries, so housing all of the information online in comprehensive, secure programs accessible and downloadable 24/7" is an un-negotiable requirement.

Once trustees become comfortable with the security and the intuitive GUI (graphical user interface), however, they tend to become converts, no matter their age or technological comfort level.

The software "has to be intuitive to use as well as flexible," Sodi said. [Directors] can print [pages or sections] and view [the binder] online. We built a workflow system. We own it and licensed it back to them [SunAmerica]." Diligent estimates that mutual fund directors are responsible for 10 times the amount of due diligence and portfolio reviews of other company directors, primarily due to ongoing regulation and compliance requirements from the SEC, FINRA and other regulators, including state insurance licensing for annuities and hybrid securities products.

"By default, there's 10 times the pain for those producing it [the board books]," Sodi said. The average paper-based board binder runs 9,000 pages or more and is not only heavy. It is not only cumbersome and something directors need to cautiously guard as they travel to board meetings. But it is an administrative headache that heretofore was outsourced at sizeable expense to transfer agents and custodians.

These "encyclopedias," to borrow Sodi's term, even contain audit committee charts and sub-advisor contracts. When that's the case, you are looking at pages numbering 15,000 or more.

On the Diligent software, updates can now be sent simultaneously and in a timely manner to all of the directors concerned-and cost is no longer an issue. All of this is done, Sodi stresses, via a secure Intranet for each investment product. An updated version of the Diligent software even allows directors to review proxy votes by individual portfolio managers or the collective team, as required by the SEC.

Back at the investment advisor, whoever is assigned oversight of the book, be it in the chief compliance officer, chairman's or custodian office, the investment advisor retains complete permissioning control over user rights and tracking administrative and other changes and updates. Thus, directors can only see the live version of the documents, even if they are updated five, 10 or 20 times. This allows general counsel to better control information, as well.