Can Fund Boards Make a Difference?

Leggio: Since we're talking about fund boards, I wanted to get a general sense of both of your opinions as to the quality of fund boards.

Professor Birdthistle, there has been evidence in numerous cases that either the fund boards had either incomplete data or maybe didn't look at the data correctly in some of the evidence that has been presented. What's your feeling as to the quality of fund boards in general in the United States?

Birdthistle: I think they've improved tremendously in the last three or four years. My experience was that following a lot of the market timing and late trading issues that arose in the early 2000s, a number of boards went looking more aggressively for very expert people to join the boards. And so the quality, I think, really spiked then.

But the quality, and in fact the intentions and good feelings of a lot of the board members, to my mind, is not really all that relevant. I think that boards, they meet three or four times a year, five or six if they're very diligent, and there's no way they can get their hands around all the information that would really be necessary to make a meaningful deliberation when you're talking about a fund family that has 200 funds.

It just can't be done. I have seen those, they are called Gartenberg review processes, when they set the fee annually. And you know, it's like speed dating going through the fund family.

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So I think they're good people who are smart and have investors' well-being at heart. I'm not sure the process is terribly helpful, and I think I may be speculating, but I think that Professor Coates and I might agree that the role of the fund boards is not terribly critical to the functioning of this industry.

Leggio: Professor Coates, do you agree with that assessment?

Coates: Not entirely. I'm not sure that Professor Birdthistle agrees with this, but I believe that competition and investor choice is the more important force constraining advisor fees, that boards are, however, important, and they are important for two reasons.

First, there are many other functions that a fund board has to perform, such as reviewing conflict of interest transactions, that I don't think could be very effectively performed by anyone else. In Europe they're performed by regulators. I don't think that's a good model for our industry.

But even within the fee context, there's an important role for boards, which is that they can take account, for example, of growth in a fund and impose, as many have done over the years, break points in the fee schedule so that the fees, as a percentage, get lower as the fund gets larger.

They've done that in numerous instances, and I believe based on conversations with fund boards, that the quality of the board and the intention of the board does matter to whether or not they're able to achieve those cost savings for investors.