Putnam punts on directors’ pay

Putnam executives who serve on the board of Putnam Funds can no longer be accused of biting the hand that feeds them.

Ending a 50-year policy, the board of directors has quietly quashed an oft-criticized practice of paying generous stipends to in-house directors and charging them as expenses to fund shareholders, InvestmentNews has learned.

The policy had raised eyebrows among fund critics, who questioned why shareholders were being forced to foot the bill for directors who may not have had their best interests at heart.

“It certainly is not a standard practice in the industry,” says Nell Minow, a principal of Lens Investment Management LLC, an activist investment fund in Portland, Maine, that champions shareholder rights issues.

“It sounds like Putnam is trying to make their own practices more consistent with what goes at most corporate boards.”

The change was unanimously approved last spring, but never publicized. It coincides with a push by the board to become more independent of Putnam Investments, the company it uses to manage the assets in its 91 funds.

It’s unlikely to result in lower shareholder fees, however.

Three of the board’s 13 members are Putnam Investments executives, but that number may be reduced in the near future.

“I can see a time in the next 12 to 18 months when we have only one affiliated trustee, maybe two,” says John A. Hill, who three weeks ago took over as chairman of Putnam Funds.

The board will also continue to pay close attention to fees paid by shareholders, he adds.

The weighted-average expense ratio of Putnam’s stock funds now stands at 1.18%, down from 1.22% in 1995. For bond funds, the weighted-average expense ratio is 1.10%, up from 1% five years ago, according to Morningstar Inc., the Chicago fund tracker.

“I want a board that is both numerically independent and feels very good about the fees it negotiates with the management company each year,” says Mr. Hill, who is replacing George Putnam, the soon-to-retire 74-year-old son of Putnam Investments’ founder.

The shift in Putnam’s long-standing policy reflects growing pressure on fund boards to respond to criticism from shareholders, the media and the Securities and Exchange Commission, which is expected to act on the issue soon.

Pamela Wilson, a lawyer with Hale & Dorr in Boston, says the recent changes at Putnam’s board also may be a result of market forces. “A lot of people feel we are going to be in a volatile and difficult market for a while and that this is a good time to make sure all the buttons are buttoned,” she says.

“Let’s face it, people pay more attention to expenses and procedural niceties when the performance isn’t there to dazzle them,” she notes.

Barry Barbash, a former top investment regulator at the SEC and now a mutual fund lawyer with Shearman & Sterling in Washington, says many fund boards may be trying to protect themselves against lawsuits that have been filed by shareholders against directors.

“It may well be that the fund industry has concluded that it doesn’t want to play in the litigation arena,” Mr. Barbash says.

“Going to a greater number of independents and reducing the number of dealings between funds and the interested directors all presents a better front for the industry.”

Big bucks

Mr. Hill says dependent directors, also known as “interested” or “affiliated,” continue to be paid for their service to the board.

But Putnam Investments, which has $395 billion in assets under management, is now footing the bill rather than the shareholders who own the funds.

Lawrence J. Lasser, whose 1999 compensation of about $27 million as Putnam’s CEO made him one of the industry’s highest-paid managers, earned an extra $189,000 for sitting on Putnam’s fund board.

Another insider, A.J.C. Smith, received $188,000 for his board duties. That’s on top of the $6.5 million he was paid as chairman of Putnam’s parent company, New York insurance brokerage giant Marsh & McLennan Cos.

For his part, Mr. Lasser vigorously defends Putnam’s old policy.

“The law makes a distinction between interested and disinterested,” he says. “But at Putnam, everyone was expected to be disinterested in spirit.”

Nevertheless, he concedes, change “gives the appearance of being better.”

The SEC is expected to come out soon with rules aimed at bolstering the independence of fund directors.

If adopted, the new rules will require that a majority of fund directors be independent, and compel all directors to disclose if they are invested in the funds on whose boards they sit.

The SEC is also considering a rule that would require independent directors who seek legal advice to hire lawyers who don’t have ties to the fund or its management.

The Investment Company Institute, a Washington mutual fund trade group on whose board of governors Mr. Lasser sits, last year adopted proposals calling for fund boards to make changes in its practices to increase their independence.