Mutual funds brag without cause
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 again recently by giving itself a big pat on the back with the release of 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 of all fund companies 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 leading the board.
“Fund boards have always taken their duties to shareholders very seriously,” Robert Uek, chairman of the Independent Directors Council, said in the news release trumpeting the findings.
“Clearly, fund boards have increased the depth of their oversight as the industry has grown and the issues affecting funds have continued to become more complex. 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 they would just beat regulators to the punch.
There’s no cause for glad-handing here.
Fund firms have done the bare minimum for what the public should have expected or demanded from a board of directors.
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.
On the governance front, you have seen no steps by the big fund firms to set up multiple boards, so that a director serves no more than, say, 25 funds. A director can only be so “independent” working for dozens of funds run by the same firm.
Chuck Jaffe is senior columnist at MarketWatch. He can be reached at cjaffe@marketwatch.com or Box 70, Cohasset, MA 02025-0070.