PHILADELPHIA — Morningstar Inc., the mutual fund research company, is backing off its long-held position that fund boards that oversee multiple funds are less effective stewards than those responsible for just a few funds.
The change of heart comes as Morningstar is revamping the “stewardship grades” it awards funds.
The Chicago-based company began grading funds on their corporate practices and board independence in August 2004.
The change is welcome news to Bruce L. Crockett, chairman of the board that oversees the AIM Funds offered by Houston’s AIM Investments.
The notion that a fund board is a less effective steward because it oversees numerous funds is just wrong, he said.
In fact, it can actually be in the shareholders’ best interest for a fund board to oversee multiple fund boards, said C. Meyrick Payne, a senior partner at Management Practice Inc., a Stamford, Conn., consulting firm for independent fund directors. That is because overseeing more funds increases a board’s leverage with the adviser of those funds, he said.
While Morningstar won’t go that far, it is willing to concede that overseeing numerous funds doesn’t necessarily hamper the ability of a board to look out for shareholders.
“There have been a lot of changes in board structure in the three years since we launched the ratings,” said Laura Pavlenko Lutton, a senior fund analyst with Morningstar.
Several boards, for example, have adopted committee structures.
Under such a structure, individual committees are responsible for overseeing specific groups of funds, she said.
Because of such moves Morningstar is less worried about a board’s ability to oversee multiple funds, Ms. Lutton said.
It is more worried about issues such as potential conflicts of interest, she said.
Rule struck down
The Securities and Exchange Commission tried to address that problem by passing a rule requiring that at least 75% of a fund board’s directors, including its chairman, be independent of the adviser. That rule was struck down twice by the courts and is now in limbo while the SEC seeks comment.
Morningstar, however, isn’t content to wait for the SEC to act.
Believing that board independence is crucial to ensuring that shareholders are adequately protected, Morningstar intends to penalize funds whose boards do not comply with the SEC’s original rule.
“We have some families that will end up losing credit for not being independent enough,” Ms. Lutton said.
Fidelity Investments of Boston, and
The Vanguard Group Inc. of Malvern, Pa., are two such firms, she said.
Fund boards for both lack independent chairmen, she said.
Some critics, however, contend that Morningstar is wrong for insisting that 75% of directors, including the chairman, need to be independent to look out for shareholders.
Stewardship ratings
Just as a board that oversees many funds can be an effective voice for shareholders, so can a board with a lead director skilled at setting and prioritizing meeting agendas — regardless of whether that director is independent, said Geoff Bobroff, a mutual fund consultant in East Greenwich, R.I.
What effect the change in thinking will have on the stewardship ratings, however, is unclear.
New stewardship ratings probably won’t be made available to investors until the fall, Ms. Lutton said.
