Yacktman's Take on Governance in Scandalous Times
February 9, 2004
NEW YORK -- Donald A. Yacktman, the president and chief investment officer of Yacktman Asset Management in Buffalo Grove, Ill., is no stranger to heated boardroom battles, and as the great bull run of the 1990s was reaching its heights, he made headlines as a result.
In 1998, Yacktman stood at ground zero in the very public boardroom corporate governance war that pitted the firm he created against the independent trustees who sat on the board of directors of his two funds (see MFMN 2/11/98). An ugly proxy fight ensued, with the SEC even getting involved and, finally, with Yacktman eventually prevailing, and the board trustees resigning.
Six years hence, and in the midst of the current mutual fund industry scandal that has some critics wondering aloud if boards of directors should be openly handing walking papers to unscrupulous fund advisers, Yacktman spoke with Money Management Executive's Editor-at-Large Lori Pizzani to discuss his current views on mutual fund corporate governance. An edited version of their discussion follows:
MME: Six years after your own personal boardroom battle with your fund's independent trustees, what have you learned about the corporate governance process?
Yacktman: That board members are human, and that they sometimes make decisions using the rearview mirror.
Back then, I had a choice of a bad decision or a worse decision. I decided that I could wait to be fired by the board and then let shareholders make the final proxy determination.
The problem with no-load funds is that investors vote with their feet. And with a proxy fight, you also have to get 50% of the vote. It can be very costly to hire a company to get the vote for you, pay the lawyers, proxy expenses, etc. It can run into the millions of dollars.
MME: Your firm has not been at all implicated in the current mutual fund scandal. But, with all of the current allegations swirling around, do you think boards should become more involved?
Yacktman: Yes. When it comes to things that are important, directors should be involved in open disclosures, and things should be kept on the up and up.
MME: What about changing a fund's or fund complex's manager? Morningstar has come out and openly called for boards to more carefully monitor and occasionally fire an advisor. Should boards be more powerful and more vigilant?
Yacktman: I don't think so. In the consumer's mind, the fund's management contract is between them and the manager - not the board of directors. That's where I have a problem. When you ask shareholders why they are in a fund, they will tell you that it is because of the manager.
The directors should have access to the information necessary to be sure that the management company is on the up and up.
Look at what we have done. We had four different vendors handling our fund services, and we pared that down to two. Four of the services we could have been doing ourselves, but we decided to farm them out. So now we have an independent, third-party vendor giving our board the information it needs and wants. And the vendors can participate in our board meetings.
MME: Has there been a concern that market timers have infiltrated your two funds?
Yacktman: No. Most of the trading abuses have occurred in international funds, and we don't offer an international fund. Our two funds are mostly domestic, and so far off from the index, that we asked, why would anyone want to time our funds?
MME: I also understand that you are erring on the side of fuller disclosure when it comes to your own personal mutual fund trading, correct?
Yacktman: Our lawyer had suggested that I put all of my fund transactions right into the board book we provide to our board trustees each and every quarter. So I did. If Dick Strong would have done that . . .
MME: For those firms embroiled in the scandal, and whose illegal or unethical activities have been discovered, what do you think their board of directors should do at this point?
Yacktman: Although the immediate problem may be that the ultimate customers may walk, the board's bigger job is to clean up the mess and make the firm better.
The underlying problem [for the industry] has been that the marketing people have taken over control of mutual funds. At Yacktman, we are not trying to make an assembly line of violins. We want to make a Stradivarius. I don't want people buying our funds without knowing what they are getting into. I would rather under sell and over deliver.
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