Being a mutual fund director is a uniquely influential position and it can be quite rewarding, both psychologically as well as monetarily. Once someone has become one there are few mechanisms by which he or she can be displaced. The purpose of this MPI Bulletin is to explore the advantages and disadvantages of placing age, term, or no limits on the length of board service.
There are approximately 2,000 independent mutual fund directors in the United States, compared with roughly 1.2 million lawyers and 650,000 CPAs. These 2,000 directors oversee $15 trillion in mutual fund assets, and about 250 of them oversee 66% of all fund assets. Though relatively few in number, fund directors are undeniably influential and perhaps even pivotal in the savings and investment process in America today.
Being a fund director is interesting and rewarding work. Directors are treated well and are involved in stimulating and vibrant topics. And while the compensation of fund directors typically pales in comparison to the salaries of the portfolio managers and investment managers they oversee, it can be a steady and significant portion of their annual income, particularly as they shift into retirement. The average age of a mutual fund director is 62, the average age of a new director is 52, and the average retirement age is 73. Twenty or more years of director fees are nice to have when other earned income is typically declining.
As a result, mutual fund directors are not inclined to resign of their own volition. So the question becomes, should a board voluntarily adopt a service limit?
The Merits of Limits
Twenty years ago, few boards had any service limits. This was partly because there was little interest from the press and the compensation was relatively low. Nowadays, corporate and fund directors are much more publicly scrutinized. Indeed the compensation of fund directors is better disclosed and more actively analyzed than that of portfolio managers. As a result, the financial media keeps a close eye on governance and the investing public wants to know what value it is getting for its dollars.
The advantage of age limits is that it provides an arbitrary but uniform standard by which to reinvigorate the board. A mandatory retirement usually leads to the appointment of a younger person with a fresh set of ideas and skills. The fund business, like any other, depends on innovation and creativity for survival, and this churn is almost always beneficial. Of course, should there be some extenuating circumstance, such as the change in control of the fund investment advisor, a particular director can be exempted for a year or two. Some boards have been known to “reject” the resignation letter of directors in order to retain them, and the use of emeritus plans has been a valid and useful approach for some boards.
The advantage of term limits is subtler. Like many other influential positions, there has been a tendency for fund directors to be white, professional men. The buyers of mutual funds are increasingly drawn from all races, demographics and creeds. This is especially true as the market for mutual funds is increasingly dependent on 401k retirement and college savings plans. As a result, our firm finds that qualified women and minorities are much sought after as candidates for open board positions. These candidates tend to be younger than the historical pattern of the 52-year-old white male.
Indeed an increasing number of new board members are in their 40s, sometimes academics or fast track executives. A new fund director appointed at age 42 may well have 30 years of service, which is of course much longer than almost any executive of the investment manager. As a result the very vitality, which their appointment was supposed to introduce, becomes suspect. The objective of bringing diversity to the board may well indicate the need to set reasonable term limits.
Very few complexes have adopted term limits at present, and few serving directors are likely to embrace them for themselves. When they are introduced, the term is often at 12-15 years, which is long enough to ensure an experienced cadre of senior directors and short enough to institutionalize vitality. When a new director is appointed there is a short window of opportunity to adopt term limits.
The advantage of no preset limit on service is that this policy allows the most experienced people to continue for an extended period. Indeed there are many octogenarians who are not only fully competent, but able to add great value due to their institutional knowledge. The disadvantage is that the director may become stale, or inadvertently co-opted by the management company they are paid to oversee, or become too dependent on the income stream as they age. Advocates of the no-limit option argue that each case can be decided on its own merits.