Fund directors: Can they speak for shareholders? - Brief Article

Kiplinger's Personal Finance Magazine, Oct, 1999

It's a fact of human nature: A mutual fund director who's also an officer of the fund's management company can't always be counted on to put the interests of shareholders first when it comes to deciding on fees, management compensation and the like. Yet many fund officers serve on fund boards. John Bogle, founder of Vanguard funds, unofficial conscience of the industry and a frequent industry scold, invokes a biblical phrase to describe the conflict of interest many directors face: "No man can serve two masters."

To its credit, the fund industry is addressing the situation with a new set of voluntary guidelines. Its list of 15 "best practices" seems reasonable enough and not overly burdensome. For instance, if a fund group adopts the recommendations, directors will personally invest in the fund they oversee; independent directors must make up a two-thirds majority of the board and must have their own legal counsel. The three largest fund families, Fidelity, Vanguard and Capital Research and Management (which sponsors the American funds), already comply or plan to comply, and others will likely follow suit.

But some insist that fund companies should do more to compel directors to be attuned to shareholders' concerns. "One of the easiest solutions is to pay directors with shares of the fund," which could be restricted so that they could sell only a portion of the shares at a time, suggests Harold Evensky of Evensky, Brown & Katz, a financial-planning firm.

Fund companies should also make it easier for individual shareholders to contact directors if they have a complaint, says Scott Cooley, a senior analyst at Morningstar. The directors could sponsor a public forum at the fund's annual meeting, or they could host live chats on the Internet. The Strong fund family, for one, posts names and biographical information about directors on its Web site. More funds could do the same.