Dear Board Doc: Our Workload Has Increased, Time to Reconsider Compensation?

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Q: A recent acquisition has left our board with an increased number of funds to oversee, including some with complex investments. Is it unreasonable for us as a board to reevaluate our compensation in light of our increased oversight duties? What are the common methodologies we can use to establish appropriate fund director compensation?

A: Boards are keenly aware of the fee compression, outflows and increasing operational costs challenging asset managers.  While boards remain mindful of these pressures, a board’s oversight responsibilities may at the same times significantly increase or change in character. When asset managers merge or acquire other businesses, directors might be responsible for overseeing a greater number of funds or funds that are more complicated or have more complex investments. These differences might require additional time to review pricing and valuation, acquire knowledge of new investment types, consider expert assistance, and increase the number and duration of regular board meetings.  It would not be unusual for a fund board to reassess its compensation structure to ensure that directors are appropriately compensated. For instance, in 2019 directors of multiple series trusts and ETFs experienced pay increases as their complexes gained assets, according to some industry media. Mutual fund boards typically determine compensation through their governance and nominating committee although some funds have a compensation committee. The committee periodically reviews director compensation and recommends any appropriate changes to the full board. In terms of comparison and benchmarking, board compensation is disclosed in all registered funds’ Statements of Additional Information filed with the SEC. Boards, with the help of counsel and consultants, can also use industry benchmarks to inform their decision making, including whether compensation is trending up or down. The MFDF every year hosts a webinar with Management Practice, Inc. discussing yearly trends in fund director compensation. According to MPI, most boards use the widely available benchmarking information derived from industry trade groups to determine compensation levels. Management Practice also issues annual surveys that cover trends in fund director compensation. MFDF members can find webinars summarizing MPI’s compensation surveys going back several years on the MFDF’s web site.

Resources:MFDF WEBINAR: Fund Director Compensation: The MPI Annual Survey 2019 https://mfdf.org/forum-news-feed/18-forum-news-feed/mfdf-webinar-fund-director-compensation-2019