In an unusual move, the board of directors that oversees the 26 proprietary, non-ETF mutual funds managed by State Street Global Advisors Funds Management (SSgA) of Boston, has adopted a two-year rotating term for its independent trustees to take the chairperson's role for a spin. SSgA is a wholly owned investment advisory subsidiary of State Street Corp.
According to a Feb. 6 filing with the Securities and Exchange Commission, effective Jan. 1, 2006, each of the current seven independent fund board trustees will be eligible to serve as board chairman "for a two-year term on a rotating basis." Lynn Anderson, 66, the board's incumbent independent chairman, will be the first to assume the two-year position, as decided upon by the board. Anderson, who recently retired as the vice chairman of Frank Russell Co. in Tacoma, Wash., has been the chairman of the board of the State Street funds since 1988.
In addition, SSgA's board of trustees has amended its compensation structure so that each fund board chairperson now receives an extra $30,000 in annual compensation. That is in addition to the $60,000 annual retainer fee that each independent trustee receives, along with separate meeting fees and extra incentive fees for serving on any of the four board committees. Serving as the chairman of those committees can bump up compensation by another $5,000 or $10,000. Previously, there was no extra compensation for serving as the board's chair.
Officials at SSgA had not responded to a request for comment by press time, and an attempt to reach Anderson was unsuccessful.
In recent months, a handful of fund boards have voted pay increases to independent board members or agreed to establish separate compensation for chairmen, just as the industry awaits the outcome of the U.S. Chamber of Commerce's court challenge to the SEC regarding the regulator's call for fund boards to be chaired by independent directors.
Having term limits for the chairman of the board is not a common fund industry practice. Industry insiders are divided on whether State Street's novel approach in playing musical chairs will prove to be innovative or troublesome.
"Rotating chairs may be a sign that the board does not want one trustee to become dominant, and to ensure that all trustees are engaged," said Meyrick Payne, president of Management Practice, a fund board consulting firm in Stamford, Conn. But there can be a downside. "It can also be a recipe for a relatively weak board, as no one is the driver,'" he added.
Of course, term limits may not be universally adopted across fund boards.
Each board should select the governance structure that fits its particular needs. "For some boards, rotating chairs is a good idea," said Dawn-Marie Driscoll, president of Driscoll Associates of Cape Coral, Fla., and a founding member of the Independent Directors Council, which is affiliated with the Investment Company Institute of Washington.
One year ago, the council's task force on independent chairs suggested that "a mutual fund board will probably best be served by having an independent chair who has the skills and abilities that the position requires including leadership, the respect of peers, communication skills and the time to devote to the position," she said. "Not all board members may have those characteristics, particularly the time."
Boards must consider their own operation and governance, choose the best person for the chair, and then periodically evaluate how well that is working, she added.
A two-year term limit could be a way to ease out an incumbent, and possibly a more senior chairperson, to make room for someone with new blood and fresh ideas, industry experts said. But many boards tackle that sensitive issue by having either a mandatory retirement age of 72 or 75, or by having a process in place to simply vote in a new independent chairperson as desired without a formal two-year limit, they added.
Sharing the Burden
Installing rotating two-year terms for the board chair is likely an attempt to have all of the trustees "share the burden," said Allan Mostoff, president of the Mutual Fund Directors Forum, a Washington not-for-profit organization for independent fund trustees. "Not one of us wants to make it a lifelong commitment," he added. With the dynamics of today's boardrooms and with the added responsibilities placed on the shoulders of fund trustees, it's not unusual to find no one stepping up to the plate to be chairman of the board, Mostoff conceded.
Two years is far too short a period of time for any board chair to successfully reign, said Carl Frischling, a partner with the New York law firm of Kramer Levin Naftalis & Frankel. "It takes a while to develop an understanding of the changing role of the chairman and what an independent chairman can do," he said. By the time a chairperson gets comfortable with the job, he or she may be moving one seat to the left.
This isn't like term limits on city mayors or members of Congress, Frischling added. If a fund board is going to install term limits, it should be at least five years to give a new chair time to get up and running, he said.
While a term limit of any length for a fund chair can be workable, the most important element will be "the smooth passing of the baton" from one chair to the next, Mostoff counseled. "The successor chair must work closely with the incumbent to assure a smooth transition."
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