Trustees Will Get Partial Pay in Shares
January 8, 2001
The independent trustees who oversee seven closed-end funds managed by Credit Suisse Asset Management of New York have changed their compensation program such that 50 percent of each trustee's annual compensation is in the form of fund shares and 50 percent is paid in cash. Previously, the Credit Suisse trustees were compensated under an all-cash arrangement.
Although the revised compensation plan originally went into effect on Oct. 1, details of the new plan were disclosed for the first time in a proxy filing Dec. 20 made on behalf of The First Israel Fund, one of the eight closed-end funds Credit Suisse manages. The funds have a total of $1 billion under management.
The fees include an annual retainer of $5,000 and an additional $500 for each board meeting attended, according to the filing. Shares of the closed-end funds are purchased for the benefit of the independent trustees in the open market, just as an ordinary investor would purchase shares of the closed-end fund.
The Credit Suisse closed-end funds' board of directors includes two Credit Suisse executives and four independent trustees who have no ties to the adviser. Only two of the independent trustees of The First Israel Fund currently own shares of the fund, according to the fund's December proxy.
The change in the compensation arrangement was approved by the board members in July, said Leslie Mayock, a spokesperson for Credit Suisse.
"The change was made to align the directors' interests with those of shareholders," Mayock said. "This is the first proxy in which the new formula has shown up."
The Investment Company Act of 1940 allows independent trustees who sit on mutual funds boards to set their own compensation formulas.
Only the one board for the closed-end funds has adopted the plan, said Mayock. Credit Suisse has no plans to expand the arrangement to its 30 retail open-end mutual funds that have over $30 billion in assets, she said.
Credit Suisse closed-end fund trustees' compensation was changed at the suggestion of Paine Webber of New York, said Mayock. Hired to suggest ways in which Credit Suisse could maximize shareholder value in its closed-end mutual funds - of which there were more at the time - Paine Webber last spring suggested the change in trustee compensation from all cash to part cash and part shares, said Mayock.
At that time, Paine Webber also suggested that Credit Suisse consolidate two pairs of closed-end funds that had similar investment styles and objectives. Consequently, in September, Credit Suisse won shareholder approval to merge the Emerging Markets Telecommunication Fund into the Emerging Markets Infrastructure Fund, and the Latin America Equity Fund into the Latin America Investment Fund.
The concept of paying directors for their board service in shares of the company has long been the formula used in corporate America, said Meyrick Payne, partner with Management Practice of New York, a consulting firm that works with mutual fund boards of directors. He estimates that 70 percent of corporate directors now receive compensation in this manner. A handful of fund boards have now adopted their version of this formula, he said.
"This assures that every trustee is a sizeable stockholder," said Payne.
The arrangement could have even more of an impact on closed-end funds than on open-end funds because if boards can find a way to "fix" the often persistent discounts at which many closed-end funds trade, the trustees will reap the financial benefits along with other shareholders, Payne said.
Discounts materialize when a closed-end fund's shares trade at a price lower than that of the fund's net asset value share price.
The practice of compensating mutual fund trustees, at least in part, in fund shares has been adopted by only a few mutual fund boards of directors and has been the subject of debate for years.
"I think it's a great idea," said Les Ogg, vice president and general counsel with the American Express Funds in Minneapolis. Ogg is the lawyer for the fund group's independent trustees. Although the trustees of the American Express Funds have not adopted such an arrangement, Ogg believes such a plan can be of value.
Ogg also sees the value in deferred compensation plans that allow fund trustees to defer receipt of some or all of their board fees. In such cases, "phantom" shares are created that track the performance of the funds trustees choose. In some instances, trustees are limited to funds on whose boards they sit. In other cases, they can choose any funds within the complex of funds for which they are trustees. When payment is made, the deferred compensation, plus whatever would have been earned if that compensation had been invested in the tracked fund, are then paid to the trustees.
"Either way, the trustees are tied to the fund, which should heighten their awareness of performance," Ogg said.
Payne and other trustee compensation analysts were unable to give a comprehensive list of companies that provide some trustee compensation in the form of shares. But, two companies that have such arrangements besides Credit Suisse are USAA Mutual Funds of San Antonio, Texas and Franklin Templeton funds of San Mateo, Calif.
USAA Mutual Funds has had a long-standing policy of paying its independent board trustees in fund shares.
"All compensation paid to trustees is used to acquire shares of one or more funds in the USAA family of funds under an automatic investment program for trustees," said a USAA fund proxy filing in August.
In February, 1998, the trustees of the Franklin Templeton funds adopted a plan that requires each board member to invest at least one-third of fees received for board service in one or more of the group's funds until the value of each trustee's investment exceeds five times the annual fee each board member receives. This level must be achieved within three years.
The annual compensation for three of the fund group's independent trustees who have oversight of between 48 and 50 different portfolios exceeds $363,000, according to an Aug. 1 filing by Franklin Templeton.