Dear Board Doc: Board Culture Takes an Unfamiliar Turn

The MFDF’s Board Doc is an occasional feature of the Daily News Feed that features questions from our readers. The answers and commentary provided in our responses do not constitute legal advice and should not be treated as such. Please consult with your independent counsel on questions of compliance with the securities laws and director fiduciary duties. If you would like the Board Doc to consider your questions, please e-mail BoardDoc@mfdf.org.

Q. I have been on my current board for over a decade and I am the chair of a committee. Our board has developed a cordial, accountable relationship with management even as our complex continues to face serious challenges with competition from passively managed funds and cost pressures. We recently lost two long-tenured directors who were very vocal during meetings and, in my opinion, asked the difficult questions that kept management accountable. We replaced them with two new independent directors who are not as vocal during meetings and who take a more measured approach to challenging management. While I have faith in our board and its abilities, I fear that our board culture, the tenor of our meetings, and our overall effectiveness is at risk. Is there a way to re-direct our board culture toward what it once was?

A.  As our industry continues to evolve, it is important that boards take seriously their fiduciary duties to the fund. It is also important to acknowledge that advisers are under immense pressures to offer high-performing, cost-competitive funds. You say that you continue to have faith in your current board and its abilities, despite the loss of the two vocal members. As a first step, you may wish to review the board’s processes for overseeing how the funds are managed and serviced, the characteristics of the board’s relationship with management, and whether each director is contributing appropriately in meetings.

You may also wish to consider that a change in approach does not necessarily indicate a change in result.  A board’s duty involves not only asking the hard questions but also ensuring that there is follow up on issues of mutual board/management concerns.  There are many effective forms of engagement other than asking “hard” questions during meetings.  The board’s ongoing relationship and engagement with management throughout the year, outside of regular board meetings, is valuable to helping boards best advance the interests of the fund and shareholders. The new directors’ more measured approach should encourage and foster that deeper engagement with management on a board-wide basis and could add balance to the board culture.

The board self-assessment is also an excellent means to express concerns. You may also review the board’s onboarding process to ensure that new directors understand expectations.  The following materials from the MFDF website should be helpful in thinking about board effectiveness and onboarding generally.