Board Assessment Processes for Fund Board and Mutual Fund Directors

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By C. Meyrick Payne of Management Practice Inc. (MPI), based on a workshop and related survey at the Mutual Funds Directors Forum Policy Conference held in Washington, DC.

The Mutual Fund Directors Forum recently sponsored a session regarding fund board and director self-assessments, which was moderated by MPI. Approximately 100 mutual fund directors, counsel and those who support fund governance were divided into 10 groups. Each was given a scorecard and asked how their particular fund group went about the board assessment process. This bulletin summarizes the results of those scorecards and incorporates some of the surrounding discussion about each of the questions, which were preceded by “does your board conduct the annual board assessment in the following manner?”:

  • For the board as a whole? Over 90% indicated agreement. This method was by consensus the easiest to conduct and least intrusive, but yielded the smallest amount of actionable feedback. However this evaluation can produce valuable guidance with regard to attendance, preparation, attentiveness, committee structure, board size and agenda adequacy.
  • For individuals on the board? About 60% had some sort of process to assess individual performance in terms of supporting the actions of the entire board. This type of review was not intended to focus on the performance of any single director but rather to ascertain if the construct of the board and qualifications of board members was appropriate to the board’s governance needs.
  • Each director assessing each other director? (sometimes known as a 360 degree evaluation) Only one fund family (about 5% of the participants) used this process on an annual basis. The chairman of that fund family made a robust case for how this admittedly intrusive technique could supplant the need for a mandatory retirement age.
  • Use a trusted third party to:
    • (a) collect input from board members? About 65% use counsel to the independent directors to develop and administer the assessment questionnaire. It seems that the most frequent approach is to distribute the questionnaire and then have counsel telephone each director to collect the responses. One family (about 5% of participants) used an independent consultant (separate and distinct from counsel) partially because counsel is so fundamentally involved in board process that they impact board effectiveness just as significantly as the directors themselves.
    • Or (b) to summarize and report the results? About 70% of the time, the collated and summarized results are passed to either the Board Chair or the Chair of the Nominating and Governance Committee. He or she then delivers the summarized results to the full board and recommends any corrective action. In the event the evaluations produce comments about any particular director, the relevant Chair talks to the director in question. While not covered in this particular survey (but based on experience) the most common issues are lack of preparedness, inattention, or impaired participation because of illness or old age. Sometimes the difficulty is lack of meeting discipline such as abruptly changing the subject or dragging out an issue beyond usefulness. Whatever the difficulty with an individual director, the Chair typically takes a proactive stance, usually advising the director to improve or leave the board.
  • Destroy the raw data from the evaluation process? Virtually 100% of the participants destroy the questionnaires but not the summarized results. The raw data could be awkward and/or compromising if subpoenaed. The edited results are important to keep, probably in the hands of counsel, as proof that an effective process actually took place, as legally required.
  • Use any quantitative measures to evaluate the performance of the fund board? Up until this point the survey questions had all assumed qualitative responses that are easier to give but perhaps more relevant to how a fund board actually operates.

This last question asked if anybody used quantitative measures such as investment performance, expense control, lawsuits or regulatory action to evaluate board performance. Not a single participant indicated using measurable results on the grounds that the board’s responsibility cannot be reduced to single metric, comparative statistic or trend. Furthermore there was a strong belief that fund directors could not directly control any particular aspect of fund operations.

In our practice we have found that absolute measures of board or trustee performance are unsatisfactory precisely because of the uncontrollable nature of investment results, but if the change from year to year is used it provided a better indicator of board and trustee effectiveness.


The MFDF, ICI/IDC and the SEC have all published various papers and guidance regarding board and director evaluations, which are readily available on their websites. Historically boards have been able to comply rather easily, especially with counsel as the facilitator. However, in more recent times, particularly after the Northern Lights sanction, the SEC has become aggressive about ensuring that board actions are not just pro-forma but have real teeth. This principle will certainly apply to the annual board and director self-assessments.

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