TIME TO GET FUNDS TO BE ABOVE BOARD ON DIRECTORS’ PAY

Sitting on a mutual fund board may be the cushiest part-time job in America, judging by some of the findings in this week’s package of InvestmentNews stories on director compensation at the largest fund groups.

The article on Page 1 and the charts and related stories on pages 40 through 45 reveal that major fund directors are routinely paid hundreds of thousands of dollars annually for — let’s face it — something that’s not exactly full-time work.

Some are even racking up million-dollar pensions. Others double-dip — working for the fund group’s parent company yet also accepting rich payment for their fund board duties.

The links between pay and the performance of the funds they oversee can be weak. And the true independence of some board members is questionable: Too often, directorships have been awarded to cronies of top managers of the fund companies.

Quite the cozy world. And that should concern shareholders.

Institutional chumminess may be one reason why mutual fund costs have remained stubbornly high during a decade of fantastic asset growth.

It certainly doesn’t encourage fund directors to quickly remove underperforming portfolio managers, much less offer strong oversight of the people who may have appointed them to their pricey posts.

The coziness is similar to that found in the world of corporate directors some 15 years ago. But pension funds and other institutional investors, including — ironically — mutual funds, used their proxy votes to demand better director and corporate management performance.

Unfortunately, there is no large group of shareholders willing to challenge fund directors — yet.

Likewise, investors haven’t rewarded the few directors who’ve publicly flexed their muscles. Ask the folks who were defeated by shareholders after daring to tangle with Donald Yacktman and Louis Navellier.

Perhaps employers sponsoring 401(k) plans, which account for a fifth of mutual fund assets, will step into the breach. Maybe financial advisers will better educate their clients on such an important shareholder issue.

Or perhaps the Securities and Exchange Commission will take a stronger role. Chairman Arthur Levitt this week will kick off a series of SEC pow-wows on how to improve fund governance. It’s a positive first step that could lead to clearer responsibilities and guidelines for fund directors who are watching out for their shareholders’ best interests.

One place the SEC may want to start this week: Requiring fund companies and directors to disclose more clearly, promptly and efficiently their compensation data, workloads and potential conflicts of interest.

The current state of disclosure is pathetic, with pay figures hidden in addendums to fund prospectuses as if they were Cold War secrets. And it’s surprising how few companies have filed their 1998 data with the SEC as of mid-February 1999.

Mutual funds should be forced to report board compensation as clearly as public companies are now required to do, so that any shareholder can easily see how much his or her fund directors are paid.

That’s the first step to answering all the other questions that will be raised in Washington this week about whether the average mutual fund director is earning his keep.