By: C. Meyrick Payne and Sara D. Yerkey, partners at Management Practice Inc. In this bulletin MPI presents the process they typically follow to complete a search for new trustees/directors of mutual funds.
In the past two years Management Practice has successfully filled five fund director positions. We have found that the secret to starting a successful fund trustee search is to listen very carefully to the existing board members. A proven process in its simplest form appears in the graphic below.
The process begins by looking ahead five years and gaining consensus regarding the challenges that lie ahead. This calls for working with the existing directors to establish which skills may be needed, either currently or in the future. Combined with a retirement schedule, a gap analysis is completed so that the search criteria are identified and agreed upon. It is often the case that new directors should be “T” shaped; that is, broad in experience, wise in judgment and collegial in behavior, but also have a particular skill or interest in a functional area which, when combined with those of the existing directors, provide the resources necessary to govern a mutual fund for the foreseeable future.
The second half of the process is to find the right candidate. Regardless of a candidate’s level of experience and functional skills, compatibility of character is a key factor for a successful placement. Understanding the board’s dynamics aids in establishing an initial list of candidates. These may be presented by existing directors, the management company, or other sources, and the list of potential candidates can easily become lengthy.
The process typically classifies the initial list into tiers and then reviews these tiers and the candidates with the board. Some will be eliminated due to conflicts of interest, such as being employed by a competitor or sub-advisor. Others may withdraw due to the time commitment involved, and occasionally a candidate might withdraw because the compensation is not sufficiently rewarding for the time and effort involved, or because other opportunities are excluded by their board service.
Finally the process calls for a creating a short list, which is usually two or three candidates to be presented to the board in person. At this point in the process, compatibility with the existing board members is a major focus, as by this stage any surviving candidate will have the necessary qualifications. Throughout the selection process, the party conducting the search should obtain and check references and as the finalists emerge, including credit, employment and background checks as necessary. Once a candidate is selected, the search company must gracefully and tactfully follow up with all other candidates who have been considered along the way.
A final but important part of the process is to provide orientation to the successful candidate. This can also be specifically tailored to the needs of a particular board or complex with participation by counsel, the management company, the auditors, and other industry associations and organizations.
A considerable benefit of using an independent search company to find a new director is that the SEC now requires disclosure of the process the board has followed to ensure “diversity” among fund directors. Diversity does not necessarily mean race or gender but can also mean a diversity of experience that meets the future needs of fund shareholders. For this reason a disciplined, comprehensive and fully documented process is important.
The search for a new director, who might well serve up to 20 years or more on a fund board, is a delicate and important project, and often merits professional assistance. The existing board will work with the new director for many years and will be legally bound by their conduct. The SEC has become quite interested in the process to ensure competent and knowledgeable board participation.
The fees for a trustee search may be based on the effort and level of experience needed to complete the project with an agreed cap the outset. Some national firms will charge a fee equivalent to one year’s compensation. Using a search firm that is well experienced in mutual fund governance can be less costly than a national executive search company because there is no learning curve and the initial list of candidates is likely to be more relevant.