Tuesday, December 11, 2012

Board Membership: Outsiders Need Not Apply

Board Membership: Outsiders Need Not Apply

About eight years ago as I was leaving the State of North Carolina, I decided I wanted to be an independent director of a mutual fund.  I thought my timing was just about perfect, because the SEC had strengthened the definition of independence and mandated that the chairman of a mutual fund be independent of the advisor (the company that actually manages the money).  I figured I had the requisite expertise, having been a money manager and an advisor to mutual funds.  I expected that there would be a bunch of openings, given the changes in the law.

Start Up Assumptions (2001)

I set out on a systematic campaign to land a position as a director.  I wrote and called a group of executive recruiting firms.  These weren’t cold calls, as I’d been recruited or solicited by all of these firms.  I also knew from my research that they aided mutual funds in searching for directors.  I wrote to about twenty of the largest mutual funds in the country, addressing letters to both the board chair and advisor.  I had North Carolina Treasurer Richard Moore, my former boss, write a letter of recommendation to this large group of funds.  I figured they’d respond, since the Treasurer administered the largest public 401(K) program in the country and was sole fiduciary of the 9th largest pension plan.  I’m pretty sure his letter was supportive.

I heard from just one mutual fund complex.  They said I had an “interesting” background, but that they did not have any openings.  I got back two or three form letters thanking me for my interest, which said my resume was now on file.  For the most part, I didn’t receive or hear a thing.  About six months after I launched my campaign, I called the one mutual fund that had responded.  The chairman told me he didn’t think there’d be an opening anytime soon.  I also phoned a couple of the headhunters, and they said they’d contact me if anything surfaced.

As part of my effort I now reached out to several law firms that routinely represent mutual funds or mutual fund directors.  At least these folks took my calls, as I’d worked with them in the past.  One lawyer finally opened my eyes.  He told me I’d never get a position on a mutual fund board.  As he explained it, I didn’t have the right social and business connections to be acceptable to the advisor or most board chairmen.  He also suspected that my background and expertise might be viewed as a threat to the advisor.  Independence dictated that a majority of directors not have had a prior employment or business relationship with the advisor.  However, the test of independence didn’t preclude familiarity or friendship.  Quite plainly, I was outside the appropriate circle.

This story plays out over and over again in corporate settings as well.  Boards don’t represent investors.  They serve one another.  It’s easy to see how this works.  Simply do an Internet search using a company name and the term “board of directors.”  Do this for three or four companies.  You’ll quickly see that white males overwhelmingly populate corporate boards.  If you scan the brief biographies, you’ll realize that directors are drawn from a tiny pool of bankers, senior corporate executives and a smattering of academics.  No matter the definition of independence, these folks are the friends of management, or in the case of a mutual fund, the advisor.  When something goes seriously wrong and the regulators are pounding on the boardroom door, these folks will stop reading from management’s script and start reading from the script provided by the lawyers they’ve just hired.  However, by then it is too late.

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