Fund boards well paid, is investor well served?

Your Funds

Dollars & Sense

April 13, 2003|By CHARLES JAFFE

CHANCES ARE you didn't get an 8 percent pay raise last year, in the middle of the bear market.

You probably didn't get an 8 percent return on even the safest of your investments.

But the guys who represent you as overseers on your mutual funds did.

According to the latest survey from Management Practice Inc. of Stamford, Conn., fund directors at the 50 largest fund companies got an 8 percent pay raise in 2002, with the median compensation rising to $113,000.

Pay varies based on the number of meetings required, the duties involved, the number of funds on which a director serves on the board and more. Pay scales are based on company policy.

At some firms, directors have responsibility for voting proxy statements, while at others that job is left to a committee composed of managers, trustees and investment strategists.

As a general rule, fund firms use one board to run many funds, so directors often sit in charge of hundreds of issues.

That's a big reason why it's difficult for individual investors to tell whether directors are worth what they're being paid.

That also has to change.

The idea that the average director's pay went up in 2002 is a bit surprising, considering that 2001 saw the Sept. 11 terrorist attacks, which drove many fund companies to hold additional, emergency board meetings to handle security and market concerns.

With those unique meetings out of the way - and with performance suggesting that few people in the fund business deserve a raise - it was reasonable to expect that director pay would hold steady or decline in 2002.

No one is suggesting that fund firms cheap out when hiring trustees. In some cases, directors are signing up for 30 or 40 days' worth of meetings in a year, and inadequate pay for such a time-consuming job is hardly going to elicit the best representatives for shareholders.

"If you pay peanuts, you get monkeys and the last thing we all need is directors who won't do the job," says C. Meyrick Payne, senior partner at Management Practices. "The issue is whether investors are getting their money's worth."

That was the question Warren Buffett raised in his latest shareholder report for Berkshire Hathaway, when he suggested that directors too often fail to negotiate lower management fees and don't pick the best possible managers.

Clearly, if the directors increase fees and retain lousy managers, they deserve something besides a pay raise. (It is interesting to note that both Fidelity Investments and Janus showed slight decreases in director pay in 2002.)

"Of course investors should be concerned," says Jack Bogle, founder of the Vanguard Group, and now a corporate activist. "These so-called independent watchdogs are getting paid so much money that, in some cases, I don't think they're paying any attention to what's going on at the funds.

"They're more concerned with keeping the revenues coming," Bogle said.

The trouble is that investors have little hope of telling the difference between whether they've got a German shepherd or a Chihuahua on their side. As a general rule, the lap dog tends to be the order of the day. The number of boards that have lifted funds from management in the past decade is tiny.

Moreover, most of the fund firms involved were small; you'd be hard-pressed to find the director pulling down a six-figure check who has done much that publicly brings into question just how a fund firm does business.

The Securities and Exchange Commission has been encouraging directors to become more active and involved for years. With the advent of the Sarbanes-Oxley legislation, directors clearly will have more requirements to live up to.

More requirements translate into even more pay, which does not necessarily improve the system.

So here's a common-sense suggestion for increasing director independence, one that the SEC might embrace over the fund industry's objections if enough investors push for it: Cap the number of funds for which a director can sit on the board.

Face the fact that nobody can serve hundreds of masters, even if they're allowed to hire help (as directors are) in gathering information.

Make the number reasonable; 25 funds sounds like a lot to me and too little to fund executives, so that probably makes it about right.

Firms with hundreds of funds would need to pick multiple boards. The compensation per director would be smaller, because the pie would be split more ways.

But the fact that directors would be getting a smaller check - and that firms might actually have to go outside the old crony network for prospects - might lead trustees to be more active.

They'd certainly have less to lose when standing up to management, which might make it easier for them to rest on their principles, and easier for investors to believe that they're truly earning their keep.

Chuck Jaffe is senior columnist at CBS Marketwatch. He can be reached at jaffe@marketwatch.com or Box 2378, Boston, Mass. 02107-2378.

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