Forum on Mutual Fund Governance Issues
February 22, 1999
The role of independent directors of mutual funds has been the subject of considerable debate recently and is the topic of an SEC roundtable this week in Washington. (see box page 36.) MFMN free-lance reporter Lori Pizzani drew together several industry leaders to discuss aspects of the issue.
To begin, Stanislaw ("Stas") Maliszewski, former independent trustee of the Yacktman Funds, told Pizzani some of his ideas about improving mutual fund governance and how better to empower independent trustees who are charged with fund oversight and making decisions in the best interests of shareholders. Pizzani then asked four mutual fund industry leaders (see box) to give their views on Stanislaw's suggestions.
Stanislaw Maliszewski: First, in my opinion no manager should carry the fund manager's name. There's an inherent contradiction of terms. It gives the perception of ownership by the manager, which is not true because share-owners are the real owners. We often hear, "He sold his mutual fund group" but that's a misnomer. The money in the fund is not "his" it is "theirs." How, as an independent director, can you negotiate with someone who owns the entity?
Barry Barbash: I can understand why this suggestion was made, but I think it wouldn't prove particularly workable. People will likely associate names with funds whether managers' names are on them or not. When I think of Magellan, I think of Peter Lynch; with John Neff, Windsor. To keep managers from affixing their names would be inconsistent with the way American society operates.
Mutual funds aren't started by an entity that then looks for the mechanism for managers to provide investment management services. Managers start funds; they have a proprietary interest. It might be a nice idea but I don't think it's consistent with the way this industry operates.
Carl Frischling: The shareholders buy shares because of the manager's name. I would not preclude the name because I do not believe that shareholders perceive that the manager "owns" the fund. Most times where you have the name of a company or an advisory, you have a license to the name. If you're the star, your name is fine.
Paul Haaga: I think the "star manager system" is a bad idea, but I do not think that giving the manager power or implying that the manager owns the fund are the reasons. I would not suggest that the response be to eliminate manager names from the funds.
Don Phillips: I think it's absurd. What's in a name, anyway? When investors buy a fund, they buy either for exposure to an asset class or to buy the services of a professional manager. The notion that you would prohibit a manager from naming a fund is silly.
Maliszewski: One-hundred percent of a mutual fund's board of directors should be independent and no affiliated directors should be seated on the board at anytime. Then, there's no conflict in dealing with someone you are supposed to have an arms-length contract with. Affiliated trustees can exert undue influence over independent trustees and create an impediment. Right now, all boards must have at least a 40 percent minority of independent trustees. But that allows advisers to keep the control. Despite all of the rhetoric, mutual fund advisers don't want independent directors. They want the credibility; they want people to think the independent directors are there.
Barbash: In 1996, the SEC looked at possible legislative changes and had all kinds of discussions with the industry about raising that percentage of independent trustees. We thought that some 90 percent of boards were majority non-affiliated. But we found out that many did not want a majority of independent directors mandated.
Some money managers look at mutual fund management as a business and believe there must be a balance between enterprise and corporate governance. Moving the fund industry to a majority of independent trustees would be seen as tipping the balance toward directors and many would find that unpalatable.
Frischling: I agree with the present regulatory structure with one exception. I believe that all boards should have a majority of disinterested trustees, now only required for three years after a merger or change in control, or for funds with 12b-1 flows. I would continue the 75 percent requirement for the three-year period. Let's remember that "disinterested" does not mean "not interested." An inside director reflects management's views. But where there's a conflict, the independents are the ones who must vote.
Haaga: I believe it is a good idea to have a majority or even super-majority of fund directors independent of the adviser. But I believe that requiring a 100 percent independent board is wrong. It's useful to have an inside person chair the board in many instances because of their knowledge and ability to prepare the agenda items.