EATING OWN COOKING IS COSTLY, MANY FIND

The money’s certainly good and the hours are even better, but increasingly independent directors of mutual funds are finding there’s a catch.

Like corporate board members who were asked to invest in the companies they direct, more and more fund board members are being asked — or required — by fund groups to put some of those board fees to work in the funds they oversee.

Relatively few firms, however, have written policies requiring or encouraging their directors to buy into their funds, even though a growing number require portfolio managers to invest in the funds they manage. For most, there is an informal, or unspoken, assumption that board members should own fund shares.

“There are many more who have rules saying in effect that thou really should than thou really will,” says C. Meyrick Payne, a consultant with Management Practice Inc., which advises independent fund directors.

Written policies are becoming more commonplace, though. Last year, for example, the San Mateo, Calif.-based Franklin Templeton fund group, whose directors are among the highest paid in the industry, began requiring board members to invest a third of the annual fees they receive in Franklin or Templeton funds. The requirement ends when the value of each director’s investments is at least five times his or her yearly compensation.

According to Management Practice Inc., Morgan Stanley Dean Witter funds demand that directors hold at least $25,000 in any fund they oversee. A Morgan Stanley spokesman declined to confirm or deny this.

Directors for the equity funds of Kansas City-based American Century Investments Inc. must have at least one year’s retainer, currently a thrifty $48,000, invested in the funds. That policy, instituted six months ago, also is likely to be applied to the separate board governing American Century’s bond funds.

“It’s more or less a trend in the industry to have your directors invest in the funds,” American Century spokesman Chris Doyle says.

A 1997 survey of 24 fund groups by Management Practice found that 36% had a formal policy encouraging or requiring director ownership of fund shares.

The progress hasn’t come fast enough, argues Don Phillips, president of Chicago fund tracker Morningstar Inc. All fund directors should invest substantially in the funds they oversee, and they ought to be putting their own money at risk, not just part of their director fees, he says.

“In no way is (not investing board fees) in keeping with best practices in corporate America,” Mr. Phillips says. “With our directors (at Morningstar), we require them to take money out of their own pocket.”

On fund proxies, he says, “I vote no for any director who owns no shares — as a matter of principle.”

Most fund companies with written policies, particularly the larger ones whose board members supervise 30 or more portfolios, don’t require directors to invest in every fund they oversee. More often, they’re satisfied if the directors have money in every type of fund the complex offers, Mr. Payne says.

For example, companies that offer state-specific municipal bond funds don’t expect their directors to invest in every one.

Still, plenty of fund groups don’t believe it’s their place to tell directors what to do with their investments.

“(Our directors) are free to invest or not invest in any Kemper fund,” says Pamela Plehn, a spokeswoman for Scudder Kemper Investments. “That is a personal decision.”