SEAT ON MUTUAL FUND BOARD MEANS YOURE SITTING PRETTY: VAN KAMPEN DIRECTOR EARNS TIDY $243,375

As an accomplished corporate and securities lawyer, Wayne W. Whalen earns a handsome salary running the Chicago office of powerful New York-based law firm Skadden Arps Slate Meagher & Flom.

But he also does well in a far less visible position as a trustee of Van Kampen American Capital’s family of 92 mutual funds in Oakbrook Terrace, Ill.

His Van Kampen pay in 1996: $243,375, not including a pension that will total $600,000.

Mr. Whalen is not alone in the world of mutual fund directors.

Members of umbrella boards that oversee all the funds of companies with $30 billion or more in assets received an average $98,300 in 1996, according to a 1997 fund industry-sponsored study cited in Management Practice Bulletin, a New York newsletter on mutual fund governance.

That’s comparable to the average $100,500 paid to outside directors of Fortune 100 companies tracked by Hewitt Associates LLC of Lincolnshire, Ill., a benefits consulting firm. (Directors of Chicago’s largest company Sears, Roebuck & Co. earned just $90,000 in cash and stock in 1996.)

For example: Chicago-based Zurich Kemper Investments Inc. (now part of New York-based Scudder Kemper Investments Inc.) paid its fund directors $87,500 to $92,100 in 1996, while John Nuveen Co. paid its fund trustees $59,000.

At a time when investors have $4.4 trillion riding on mutual funds, directors’ pay is hotly debated within the industry but receives little outside scrutiny.

And while corporate directors are under increasing pressure from investors, mutual fund directors rarely feel the sting of shareholder activism, even though mutual fund expenses continue to rise while some say economies of scale should be driving them down.

While the size of the average mutual fund has increased more than 1.5 times over the last five years, Chicago-based fund researcher Morningstar Inc. calculates that bond fund expenses have risen an average 17.6%, and stock fund fees are up 4.0%.

“This is a very well-paid industry,” says C. Meyrick Payne, a cons
ultant with Management Practice Inc., which advises directors. “The fact that expense ratios have increased while assets have also increased should give directors pause.”

Directors say their responsibilities are complex and growing, and pay is an issue they review carefully. A case in point: Directors of Van Kampen’s open-end funds, including Mr. Whalen, recently agreed to a cut of about 12% from their 1996base pay of $104,875.

Directors maintain that they more than earn their keep.

“The responsibilities of mutual fund directors are significantly broader than the responsibilities of directors in public corporations,” says Mr. Whalen. “I don’t think a day goes by when we don’t deal with one matter or another involving the funds.”

Says Dennis McDonnell, president of Van Kampen American Capital Investment Advisory Corp., “The level of time they have to put into this is quite demanding.”

Why do some fund trustees enjoy such lofty compensation? Most fund companies maintain umbrella boards in which one set of directors oversees all the company’s funds. Directors collect fees from each fund, even though it’s usual to hold fund meetings on the same day.

Fund family values

As a fund family grows by attracting more assets or through acquisitions so does the trustees’ pay. (Some fund families operate clustered boards in which several groups of directors oversee particular funds based on factors such as investment criteria.)

Boards usually meet four times a year to monitor investment performance and management and expense fees, and to review fund audits, shareholder service and marketing agreements and other legal and compliance issues.

Time requirements vary. Fund families like Van Kampen and Zurich Kemper, with diverse offerings, require longer meetings (sometimes spanning two or more days), more work than mostly single-product families like municipal bond fund manager Nuveen.

To be sure, fund directors’ pay runs the gamut. Christopher Kennedy, executive vice-pre
sident of Chicago’s Merchandise Mart Properties Inc., collected just $7,400 in 1996 as a trustee of Ariel Capital Management Inc.’s three funds, which have combined assets of $464 million. John Schwemm, retired chief executive of R. R. Donnelley & Sons Co., received $14,000 for helping oversee five William Blair & Co. LLC funds totaling nearly $1.8 billion in assets.

That contrasts sharply with big companies like Van Kampen, Zurich Kemper and Nuveen, which pay much richer sums.

For example, Mr. Whalen and University of Chicago President Hugo F. Sonnenschein each received $138,500 in 1996 as trustees of Van Kampen’s 37 closed-end funds totaling $14.4 billion in assets.

In addition, Van Kampen paid Mr. Whalen and several other directors, including Heidrick & Struggles Inc. managing partner Linda Hutton Heagy, $104,875 each for serving as trustees of its 55 open-end mutual funds, which hold a combined $35.9 billion in assets.

Nuveen paid $59,000 in 1996 to retired Northern Trust Co. executive Lawrence Brown and Northbrook, Ill., consultant Peter Sawers to over its 94 funds’ $36.6 billion in assets.

Expenses rise with assets

Zurich Kemper paid Lewis Burnham, a management consultant and former executive of Anchor Glass Container Corp., $88,800, and Monsanto Co. Vice-chairman Robert Hoffman $91,100 to sit on its fund boards overseeing $39.1 billion.

All this would be of little consequence if mutual fund fees responded to economies of scale. However, expenses of stock and bond funds continue to escalate, despite the steady flow of money into funds.

“The trend in expenses is one that has to be looked at,” says Morningstar president Don Phillips.

One factor may be that fund directors have much more contact with the management company than do shareholders. “Directors usually just hear management’s side,” adds Mr. Phillips, “and it’s very well-articulated and likely to be very convincing.”

Crain News Service

Well-Upholstered Chairs

WAYNE W. WHALEN

Partner, Skadden A
rps Slate Meagher & Flom, Chicago

Trustee, 92 Van Kampen American Capital mutual funds

1996 trustee pay: $243,375

LINDA HUTTON HEAGY

Managing Partner, Heidrick & Struggles Inc., Chicago

Trustee, 55 Van Kampen American Capital mutual funds

1996 trustee pay: $104,875

HUGO F. SONNENSCHEIN

President, University of Chicago

Trustee, 37 Van Kampen American Capital mutual funds

1996 trustee pay: $138,500