Directors' Proposals Could Increase Turnover
July 12, 1999
The Investment Company Institute's new voluntary guidelines for mutual fund directors could increase the turnover of fund directors by more than one-third in the next five years, according to an industry consultant.
As many as 700 to 800 new independent directors could join mutual fund boards as a result of the new guidelines for fund directors, said C. Meyrick Payne, a senior partner at the consulting firm of Management Practice in New York. That estimate, which Payne described as preliminary, is an increase from the approximately 500 to 600 new directors Management Practice had expected in the next five years because of retirements among fund board members, Payne said. There are currently approximately 3,000 independent fund directors, Payne said.
Last Wednesday, the ICI's board of governors unanimously voted to adopt the 15 recommendations which the Institute's Advisory Group on Best Practices for Fund Directors proposed on June 24. The guidelines are voluntary. Nevertheless, the ICI recommended members implement them as soon as possible. ICI officials said it plans to offer a training program about the recommendations this fall.
"Our goal is for all funds to adopt all of the recommended practices," said Matthew Fink, the president of ICI, in a statement.
The proposals include three which should result in new faces joining fund boards. The ICI guidelines recommend that fund boards set mandatory retirement ages, have at least 67 percent of their members be independent from the fund advisor, and prohibit former employees of the adviser from serving as independent directors.
Fund boards initially may drop members previously considered independent but who would be characterized as affiliated with the fund adviser under the new ICI standards, said Pamela Wilson, a mutual fund lawyer at Hale & Dorr LLP in Boston. Boards then may search for new independent directors, Wilson said.
Independent trustees may in some cases be hard pressed to find a sufficient number of qualified directors who are not affiliated with an adviser, Wilson said.
"People are going to have to work harder and harder to recruit new trustees," Wilson said.
These changes, however, will occur only if the ICI recommendations are adopted widely, executives and consultants said. At some companies, that is uncertain.
Some recommendations, such as having an independent lawyer serve as counsel to a fund's independent directors, are not likely to be universally adopted among smaller fund groups, executives and industry lawyers said.
Other proposals, meanwhile, may not be applicable to a fund complex, executives said. For example, the ICI recommended fund complexes drop the one-board-per-fund practice that a majority of funds use today. The ICI guidelines provide that fund complexes adopt a single board for all funds or use one board to oversee a group of funds within a complex. The proposal applies only to fund complexes with a significant number of funds, a minimum the ICI did not identify.
Lacy Herrmann, chairman and founder of Aquila Management Corp. of New York, advisor to the Aquila Group of Funds, said he expects Aquila funds will not follow the ICI recommendation of adopting a single board because of the Aquila funds' distinctive board membership.
Aquila manages 14 funds with about $3.2 billion in assets. Aquila uses local directors to oversee its single-state and regional equity funds, an arrangement which allows shareholders to capitalize on individual directors' knowledge, Herrmann said.
"We have local parties running the portfolios, local parties as marketing people, local people as board members and local annual meetings," Herrmann said.
The ICI's proposals were favorably received overall, although Payne of Management Practice in New York suggested the committee could have recommended additional changes. For example, the ICI committee should have recommended that fund directors hold an annual meeting to learn directly about the issues which trouble shareholders, Payne said. The committee also should have proposed limiting the number of terms a director can serve, Payne said.
If the proposals are widely adopted, the effect on fund corporate governance would not be immediate, executives, consultants and lawyers said.
"I don't see the recommendations as resulting in drastic overnight changes but I see it as more as an evolutionary change," said Robert Zutz, a lawyer with Kirkpatrick & Lockhart LLP in Washington, D.C.