In the town where I live, the motto of the local high school is “If better is possible, good is not enough.”
In the community where most Americans invest, the mutual fund world, the motto seems to be “If good is possible, why make it better?”
That’s not a statement on performance – though it could be in many fund shops – but rather an indictment of the industry’s steps toward improving fund governance.
The industry proved the point last week by giving itself a big loud pat on the back with a joint survey by the Investment Company Institute, the trade association for the industry, and the Independent Directors Council, which details “increased commitment” to shareholders.
The study shows that over the past 10 years, fund boards have “increasingly adopted practices that benefit shareholders. Further, they have often adopted these practices in advance, or in absence, of any regulatory mandate to do so.”
In short, the fund industry has done its homework without being threatened with detentions; it hardly means the business is making the honor roll.
Specifically, the study found that by the end of 2006, independent directors made up three-quarters of boards at nearly 90 percent of fund firms, and that 75 percent reported having at least one board led by an independent chairman or an independent lead director. By comparison, in the mid-1990s, less than one-quarter of fund complexes had an independent trustee as lead.
The study also showed that 90-plus percent of fund firms now have separate legal counsel to serve their independent directors, up from about two-thirds of the firms in 2000. And “a vast majority” of funds now claim a financial expert as part of their audit committee; by rule, a fund isn’t required to have a financial expert on its audit panel – go figure – it simply needs to report whether it has one.
“Fund boards have always taken their duties to shareholders very seriously,” Robert W. Uek, chairman of the Independent Directors Council, said in the press release trumpeting the findings. “This report indicates that shareholders should be confident that directors are keeping a close watch on their funds.”
Bzzzzzt, wrong answer.
Funds have taken a journey toward improvement that they should have made long ago. While they did it without legislation or rules forcing the changes, many of the current “best practices” were part of proposed industry reforms and were adopted in many cases by firms figuring that they would just beat regulators to the punch.
There’s no cause for glad-handing here.
Fund firms have done the bare minimum of what the public should have expected or demanded from a board of directors.
Yes, it’s an improvement. No, it doesn’t go far enough to make shareholders happy.
What you haven’t seen in the past decade is those boards standing up regularly to management practices that are bad for investors. Plenty of funds have retained mediocre or lousy managers year after year, have pushed through fee increases, or have failed to push management to close a fund to new cash after passing the ideal size for the strategy they employ.
Fund directors say that investors can always take their money elsewhere, which is why they don’t want their boards to interfere with management. While that’s true, it’s not necessarily realistic; many investors are locked into retirement plans with limited selections, or they have long-time holdings that will generate huge taxable gains if they make a change.
Investors deserve activist boards that defend their best interest. That’s a few steps beyond having a financial guy on the audit panel, or even having an independent chairman.
Chuck Jaffe: cjaffe@marketwatch.com
