Mutual Fund Director Compensation: The 2014 Management Practice Annual Survey. May 13, 2014

Transcription

1 Mutual Fund Director Compensation: The 2014 Management Practice Annual Survey May 13, 2014

2 Introduction The Mutual Fund Directors Forum (MFDF) is an independent, nonprofit organization that serves the independent directors of U.S. mutual funds. Management Practice, Inc. (MPI) has been an active adviser to mutual fund directors and their counsel since

3 Today s Speakers Susan Wyderko (Moderator) Meyrick Payne Jay Keeshan President and CEO, Mutual Fund Directors Forum Sr. Partner, Management Practice Partner, Management Practice 3

4 Agenda Part 1: Survey Methodology Part 2: Director Demographics/Industry Statistics Part 3: Director Compensation Data/Setting Director Compensation Part 4: Other Compensation and Governance Practices Part 5: Director Impact, Effectiveness and Cost 4

5 Setting Trustee Compensation Properly is Important for Many Reasons Must be fair to shareholders Must be fair to board members increasing workloads, duties and exposure. Necessary to attract/retain high quality trustees Regulatory impact/optical considerations Industry growth (AUM, market timing, distribution channels, new products (e.g. ETFs), complex investments (e.g. derivatives) 5

6 PART 1: Survey Methodology 6

7 Survey Methodology 375 Complexes 1960 Trustees/Directors 50+ Surveys SAIs, Morningstar, ICI 7

8 PART 2: DIRECTOR DEMOGRAPHICS/ FUND INDUSTRY STATISTICS 8

9 Director Demographics 2,200 fund directors for about $15 trillion AUM 287 directors in 25 complexes govern 68% of all fund assets Average age 65 Incoming age 52; Retirement age 72 + Tenure averages 20 years but sometimes shorter due to mergers, consolidations, and liquidations 9

10 U.S. Mutual Fund Industry in 2013 Director compensation was up 7% while industry assets were up 15%. Average Rate of Director Compensation Growth 7.2% Fund Assets ($15T) 15.1% Number of Funds (7,710) 1.6% Source: Mutual Fund NSAR Filings (Trustee Compensation and Expenses); ICI Trends in Mutual Fund Investing (change in fund assets and number of funds). 10

11 PART 3: DIRECTOR COMPENSATION Source: Statistical data from MPI surveys, corporate proxies, and US Government/SEC filings 11

12 Breakdown of Board Compensation: Structural/Pay Methods 70% of directors are on boards that pay a combination of retainer plus meeting fees, down from 79% seven years ago Board Compensation 4% 26% 70% Board Compensation Trend 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Retainer & Meeting Fees Retainer Only Meeting Fees Only 12

13 Median Total Director Compensation in Total Assets Governed Total compensation rises with increasing asset levels. Assets in Billions $260,000 $195,688 $210,750 $107,000 $16,000 $41,000 $67,500 Less than $1B $1B-$3B $3B-$10B $10B-$25B $25B - $50B $50B-$96B Greater than $96B 13

14 Median Total Director Compensation in 2013 Number of Funds/Portfolios Governed Total compensation increases as the number of funds/portfolios governed grows. Number of Funds/Portfolios $252,500 $275,625 $208,000 $143,650 $14,000 $37,750 $60,000 1 to 3 4 to 7 8 to to to to Funds and up 14

15 Corporate Board Corporate Board Compensation Median Total Compensation % of pay in Share Grants Number of Independent Directors Aggregate Board Pay ExxonMobil $330,000 71% 12 $4,500,000 General Electric $322,000 65% 17 $5,500,000 J&J $276,000 53% 12 $3,000,000 IBM $300,000 60% 12 $3,700,000 Walmart $269,000 65% 13 $3,700,000 JP Morgan $270,000 63% 12 $3,300,000 Verizon $282,000 53% 13 $3,700,000 Priceline $315,000 79% 9 $2,800,000 Apple $316,000 79% 7 $2,400,000 Google $419,000 82% 7 $3,700,000 Data is approximate and findings may differ due to varying reporting standards and other factors. 15

16 Degree of Difficulty: 4 Dimensions of Complexity Structural Complexity Distribution Platforms Number of sub-advisors New Fund Activity Product Complexity Investment Categories Alternative Funds Other (tax strategies, securities lending, etc.) Investment Complexity Fund Count Fund Types (OE, CE, ETF, Alloc. etc.) Share Classes Fee structures Organizational Complexity Legal Activity AUM Number of sub-advisors 16

17 Type of Compensation for Committee Service Most boards pay at least some form of compensation for committee service, as the importance and workload of committees increases. In particular there has been a greater tendency to pay committee chairs, with 82% of boards paying at least some form of chair fee. 49% Chair Fee Only 14% Meeting Fees and Chair Fees 49% 14% 13% 8% 8% 4% 4% 13% No Compensation 8% Retainer and Chair Fees 8% Retainer, Meeting Fees and Chair Fees 4% Meeting Fees Only 4% Retainer Fees Only 17

18 Committee Chair Fees Committee chair fees are being added or increased as these positions require increasing responsibility, expertise, and effort, as well as additional exposure. 100% % of companies with listed committee % of paid committee chairs for boards that have them 80% 60% 40% 20% 0% Audit Nom. and/or Gov. Compliance Investment Contract 18

19 Average Committee Chair Fees Committee chair fees vary among fund and committee types often depending on asset size and fund complexity. The following chart depicts the range and average fee paid to each committees chair. Some of the larger complexes that have higher committee fees also may be the funds that have additional committees for areas such as investments, causing the average to be higher than audit, where 100% of boards have committees. $78,750 Average $52,000 $52,000 $63,000 $65,000 $27,686 $24,650 $25,916 $15,276 $5,000 $4,000 $5,500 $5,000 $32,900 $10,000 Audit Nom.and/or Gov. Compliance Investment Contract 19

20 PART 4: OTHER COMPENSATION AND GOVERNANCE PRACTICES Source: Statistical data from MPI surveys, the Investment Company Institute and US Government/SEC filings 20

21 Board Independence 87% of participating board members are independent ( disinterested in legal parlance) Over 93% of boards comply with the SEC s formerly proposed Super Majority rule requiring 75% independent directors The compliance to the Super Majority has increased from 85% in 2005 % of Independent Directors on Board 13% 87% Insider Independent 21

22 Board Leadership 70% of fund boards are chaired by an independent director, up from 60% seven years ago. While 30% have insider chairs, 15% also have a lead independent director. 2% 15% Independent Chair and Lead Independent Director: 2% 68% 15% Insider Chair Only: 15% Insider Chair and Lead Independent Director: 15% Independent Chair Only: 68% 22

23 Average Number of Board Meetings The majority of boards meet 4-5 times a year, but some meet up to 8 times or more depending on the size and complexity of the complex. Additional meetings are often called due to particular events such as fund introductions/mergers, regulatory issues, or market crises Asset Managers by Size Average < $10 bn $10-$50 bn $50-$100 bn $100+ bn 23

24 Length of Board Meetings 61% of board meetings last more than 1 day, reflecting the need for additional time to cover extended agendas and complexities. Board Meeting Length % of Meetings More Than One Day 13% 26% 31% 16% 14% 80% 70% 60% 50% 40% Less than 1 Day 1 Day 1 1/2 Days 2 Days 2+ Days 30% 20%

25 Board Committee Detail All boards have an audit committee, most have governance and nominating committees and many have an investment and/or compliance committee. There has been a notable increase in the number of governance committees and investment committees in response to changes in the market and industry. Percent of participants with each committee* 100% Audit 73% Nominating and/or Governance 39% Investment/Performance 32% Compliance 25% Contracts 25% Pricing/Valuation 19% Executive 8% Marketing/Distribution 9% Brokerage/Portfolio Trading 4% Ethics 3% Proxy * Does not add to 100% due to non-exclusive nature of committees. 25

26 Board Retirement Age 73% of participating boards have a mandatory retirement policy. The most frequently reported retirement age remained 72 as it has been for many years, now at 47% of boards. However, 47% reported retirement ages above 72. 5%-10% of boards have an emeritus program. Mandatory Retirement Age (for boards that have them) 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% 47% 31% 8% 11% 3% <

27 Number of Independent Board Members Merger activity can cause wide variability in head counts (sometimes up to 15 members or higher) as boards combine and consolidate. However the majority of fund boards have three to six independent members. 26% 8% 19% 15% 10% 9% 10% 2% 1-2 Members Members 27

28 Findings on Independent Fund Director Demographics The median director age was 66 the average was 65 18% of independent directors are female 61% of directors served on other corporate, charitable or non-profit boards 15% served on other mutual fund boards down from 19% seven years ago (2006) 35% are retired from their primary profession 3% of independent directors had been employed in the past by the complex for which they currently serve 28

29 PART 5: DIRECTOR IMPACT, EFFECTIVENESS & COST 29

30 COST EFFECTIVENESS OF MUTUAL FUND DIRECTORS Independent directors of U.S. mutual funds oversee about $7 billion each; each NYSE corporate director oversees about $1 billion in market cap The cost of the board is about $17 per $1 million invested The leverage is large: $17 buys oversight of about $10,000 in expenses per $1 million invested Mutual fund directors are remarkably cost efficient: approximately 2,200 directors plus about 400 regulators oversee about the same assets as all retail bank deposits, which have about 30,000 regulators 30

31 QUESTIONS? Or Contact: Meyrick Payne: Jay Keeshan: 216 West Hill Road Stamford, CT Phone: (203)