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Shareholder Urges Big Stakes for Directors


The Matthew 25 Fund has only $27 million under management. But one shareholder would like to see the diminutive fund adopt a requirement that each of the fund's directors have a $25,000 stake in the fund before he is elected, or reelected, to serve as a director.

In a proxy statement filed Sept. 19 on behalf of the fund, shareholder Jack Kreischer, a CPA and managing director of Kreischer, Miller & Co., a public accounting firm in Horsham, Pa., sought shareholder approval to amend the by-laws of the Matthew 25 Fund. Kreischer proposed that "to be elected, or re-elected, as a director of the Matthew 25 Fund, a nominee shall be required to be a shareholder...of at least $25,000 worth of shares of the fund in each of the twelve months preceding the date of election."

"My objective is for directors to have sufficient financial investment to demonstrate their confidence in the Fund as an investment, and to imply that their interests are consistent with those of the shareholders," said Kreischer in the proxy.

Kreischer, whose firm's current investment in the fund is valued at about $370,000, originally raised this issue a year ago with Mark Mulholland, the president and portfolio manager of the Matthew 25 Fund and owner of the fund's adviser, Matthew 25 Management Corp. of Jenkintown, Pa.

While Mulholland had said that he did not necessarily agree with the proposed mandate, he encouraged Kreischer to pursue it, including by proxy, said Kreischer in an interview.

"I thought it was important that anyone who was a director have a stake in the fund," said Kreischer. "How can you have the perspective of a shareholder if you don't own any shares of the fund?"

Kreischer said he chose the $25,000 figure because he believes it represents an investment significant enough to let investors know board members are truly aligned with their interests.

"His request was reasonable, and in spirit we agree with it," said Mulholland in an interview. While the fund's trustees are encouraged to own shares of the funds for which they have oversight responsibility, he does not believe that mandating the trustees to invest a specific amount in the fund before they are elected makes sense, he said.

"My biggest complaint was the 12-month period," he said. It could be difficult to compel someone to own shares before they are elected to be on a board, Mulholland said.

The $25,000 mandate could become an obstacle to finding and attracting trustees to serve on the board in the future, Mulholland said. While all of the six current trustees own more than $25,000 worth of fund shares, future trustee nominees may not have the financial wherewithal to do so, he said.

"In spirit I agree with it, but there could be exceptions," said Mulholland.

Kreischer said he appreciated that the $25,000 requirement could present a problem.

"In a small fund, you have to get people on as directors, some of whom may not have the financial wealth [to do this]," he said.

In his proposal, Kreischer makes no distinction between independent directors and affiliated, or inside directors with regards to the investment requirement. Kreischer's proposal would require the four independent trustees of the Matthews 25 Fund as well as Mulholland, and Steven D. Buck, to maintain a similar $25,000 investment. Buck, because his law firm provides legal counsel to the fund, is considered an "interested person" and consequently an affiliated director.

Requiring board members to have a significant ownership stake in the funds they oversee is not a new issue and has been debated for years by fund executives, lawyers and trustees themselves. And, defining a "significant ownership stake" has proven difficult.

"I agree with the basic idea that all fund directors should have an investment in the fund," said Donald Simon of Napa, Calif., a former mutual fund independent trustee. "The amount should be based on the circumstances of the trustee, but it should be a meaningful amount in that regard. Whether that should be $10,000, $25,000, etc., I don't know."

A few years ago, the board of directors of the Morgan Stanley Dean Witter group of now 92 mutual funds adopted a directive that each of the directors invest at least $25,000 in any combination of the Morgan Stanley Dean Witter or affiliated Discover Brokerage Index Series mutual funds on whose boards the directors served. The policy also recommended, but did not require, that each of the directors increase his holdings above the $25,000 minimum level.

As part of the Morgan Stanley Dean Witter director ownership policy, new directors are given a one-year grace period, beginning at the time of their election to a board. Sometime during that year, the directors must meet the investment requirement. As of Sept. 30, 1999, board trustees or their spouses had a total of $43 million invested in the funds, according to a proxy statement filed on behalf of the fund group in November of last year.

The filing also revealed that independent directors of the Morgan Stanley Dean Witter funds are well paid for their service. Each of the group's six independent directors received annual compensation of between $120,150 and $160,731 in 1999.

That contrasts sharply with the $2,000 annual compensation - paid in fund shares - that the directors of the Matthew 25 Fund currently receive.

"That's the risk you take when you stipulate a dollar amount," said Kreischer. He said that his intention was to simply raise the ownership concept with the board and then let the board work out the details.