Heads in the Sand

Articles by Fund Democracy: Archives

Heads in the Sand, Barron's (Apr. 10, 2000).

Abstract: Mutual-fund governance has been on the SEC's front burner for over a year, and still the industry doesn't get it. At least, that was the impression created by a recent conference in Washington on Crucial Issues for Investment Company Directors. The gathering, which followed on the heels of SEC fund governance proposals, shed light on how directors plan to improve governance. Most telling was the reform most often suggested by panelists and members of the audience: that the SEC do more to protect directors from shareholder suits. Ask not, in other words, what you can do for shareholders, but rather what they can do to you. (The full text of this article is available to Barron's subscribers.)

This article illustrates fund directors' ineffectiveness when it comes to overseeing the business aspects of mutual funds. Many directors agree with this characterization, arguing that the role of fund directors, unlike the role of directors of other types of companies, should be limited to acting as proxies for regulators, and to ensuring that fund management complies with the letter of the law. This lobotomized view of fund directors, however, flatly contradicts the structure and purpose of our corporate governance system, and strips fund shareholders of desperately needed representation in the boardroom. The SEC's proposed fund governance rules are first step at holding directors' feet to the fire, and giving them the authority they need to stand up to fund management. Further action by Congress and the courts will be necessary, however, before fund directors can assume their proper role as watchdogs for mutual fund shareholders.