The cozy relationship between mutual fund boards and management more is likely to take center stage in future investigations by securities regulators since eight directors at Bank of America's Nations Funds were removed as part of a landmark $675 million settlement with New York Attorney General Eliot Spitzer and the SEC, according to a Wall Street Journal expose.
Investigators are especially interested in the questionable practice of seating individual directors on more than 100 boards, which has become the status quo at the largest mutual fund providers, including Vanguard and Fidelity Investments. Experts are also beginning to scrutinize whether executives such as Marvin Mann, a retired chairman of Lexmark International Inc., has the time to keep up with the demands of sitting on the boards of more than 250 diverse mutual funds at Fidelity and at the same time effectively advocate shareholders' interests, such as capping fees and demanding competitive performance.
But busy professionals are welcomed on dozens of fund boards. Lawrence Cohn, a busy cardiac surgeon who supervises a team of doctors at a Boston Hospital and teaches in at Harvard Medical School, somehow finds the time to serve as a trustee for 109 funds managed by Massachusetts Financial Services.
Warren Buffet, chief of Berkshire-Hathaway, has joined an increasingly boisterous chorus of critics who say the often incestuous relationships between trustees and fund company executives has led to frequent rubber-stamping of management decisions that harm shareholders' interests. Richly compensated trustees who face enormous time constraints from commitments to dozens of boards failed to stand up to fund companies' demands for higher fees while assets grew astronomically, according to The Journals report.
Morningstar reports that domestic stock funds on average charged 1.54% in 2003, a significant jump from 1.34% in 1993. As a result, fund companies raked in billions of extra profits during that period.
Another separate study by Management Practice Inc. found that asset managers with at least 70 funds paid fund providers with at least 70 funds $100,000 median salaries to trustees while smaller competitors with fewer than seven funds limited median fees to $11,334. Mann earned a lofty $324,000 from Fidelity last year.
Critics are also calling for closer inspections, and disclosure, of seemingly independent directors who in reality often maintain strong personal ties with management. For example, three independent trustees at Franklin Templeton funds Charles Johnson, chairman of Franklin Resources Inc, Joseph Fortunato, an attorney, and Harris Ashton, a retired business executive share the distinction of playing football for Yale in 1953.
The staff of Money Management Executive ("MME") has prepared these capsule summaries based on reports published by the news sources to which they are attributed. Those news sources are not associated with MME, and have not prepared, sponsored, endorsed, or approved these summaries.