Mutual Fund Boards vs. Corporate Boards

1. Mutual Fund Boards vs. Corporate Boards Patricia M. Flynn, PhD Trustee Professor of Economics & Management Bentley University pflynn@Bentley.edu “Seat at the Table” Board Options October 26, 2017

2. I. CORPORATE BOARDS Director Characteristics (S&P500) • Average board size: 10.8 • Average # of board meetings per year: 8.4 • Average age of independent directors: 63 years • Average tenure on the board: 8.3 years • Retirement age: most (95%) at 72+. • % of new independent directors that are first-timers: 32% (all-time high.) • % of independent directors that are female: 21% • % of new independent directors that are female: 30% • % of independent directors that are minority: 15% • % of new independent directors that are minority: 15% Source: Spencer Stuart 2016 Board Index

3. Board Committees • Audit Committee* • Compensation Committee* • Nominating/Governance Committee* • Executive Committee • Finance Committee • Risk Oversight/Crisis Management • Other * Members all “independent” directors.

4. Characteristics of New Independent Directors (S&P 500) 20162006 Financial backgrounds 25% 24% Div. Pres./line or functional head 23% 15% Active CEOs/COOs/Pres. 19% 29% Retired CEOs/COOs/Pres. 19% 11% Academics/nonprofit 4% 8% Consultants 3% 5% Lawyers 1% 2% Others* 6% 6% *Mostly retired government and military officials, plus a few other retired executives. Source: Spencer Stuart 2016 Board Index

5. “Wish List” for New Director Backgrounds, 2016 (S&P 500) Active CEO/COO 63% Retired CEO/COO 58% Financial expertise 55% International expertise 55% Technology expertise 44% Industry expertise 37% Digital or social media expertise 21% Marketing expertise 19% Regulatory/Gov’t experience 19% Minorities 55% Women 64 Source: Spencer Stuart 2016 Board Index

6. Public Company Director Compensation (2016) Size*Avg.Total Comp. ** % Cash Micro $ 120,286 51% Small 157,292 47% Medium 181,357 44% Large 222,227 44% Top 200 271,456 42% All Firms 191,440 45% *Micro($50-499mil); Small($500-999mil); Medium ($1bil - 2.4bil); Large($2.5 bil – 9.9 bil) Top 200 ($10 bil. +) largest U.S. industrial and service corps ** Includes all compensation, i.e., board cash retainer, meeting fees, committee pay, stock and stock options. Source: 2016-2017 NACD Director Compensation Report.

7. II. MUTUAL FUND (MF) BOARDS • Approximately 2,000 fund directors (trustees) oversee about 9,000 funds with over $16 trillion assets under management (AUM). • The largest 10 complexes account for about 2/3s of the AUM. (2016) • Black Rock, Vanguard, State Street Global Advisors, Fidelity, JP Morgan, BNY Mellon, PIMCO, Prudential Investments, American Funds, TIAA.

8. MF vs. Corporate Boards: Similarities • MF boards have a fiduciary responsibility to protect the interests of the shareholders. • Other similarities: • Executive sessions • Codes of ethics • Board self-evaluations • Hire outside experts

9. MF vs. Corporate Boards: Differences • The funds are not an operating company with employees in the traditional sense. A MF board is trustee of the funds, not the board of the fund’s advisor. The funds have no employees, and rely on the adviser to carry out the funds day-to-day operations. • MF boards can choose not to renew the contract of the Investment Advisory – not the CEO– but this is rare. • No required annual meeting of shareholders of open-ended funds. Meetings called for various required votes, e.g., fund mergers. • There are contracts and compliance committees, but no compensation committee. • While corporate boards focus on income statements, balance sheets, cash flow, CEO performance, executive comp. etc., MF boards focus on: • compliance with the Investment Company Act of 1940; • Investment advisory agreements (15C process). • Fund performance, fees, contracts • conflicts of interest between the Investment Adviser and shareholders; • risk.

10. Mutual Fund Board Trustee Characteristics • Management Practice study of 403 fund complexes and 1,902 trustees/directors. • Independent trustees: 85% • Independent trustee average age: 67 years • Independent trustees that are female: 20% • Incoming trustees that are female: 33% • Retirement age: Shifting to 75 years • Average tenure on the board: 12 years Source: MFDF and Management Practice, Mutual Fund Director Compensation: The 2016 MP Annual Survey, May 17, 2016.

11. Mutual Fund Director Compensation, 2015 Assets under Management (AUM)Median Total Compensation < $ 1 bil. $ 10,000 $ 1bil. - $3 bil. $ 42,000 $ 3 bil. - $ 10 bil. $ 80,000 $ 10 bil. – $ 25 bil. $ 115,000 $ 25 bil - $50 bil. $ 208,125 $ 50 bil - $97 bil. $ 266,500 > $96 bil. $ 295,833 Source: MFDF & Management Practice, 2016.

12. III. GETTING THERE Discussion • How to get on a corporate board or mutual fund board. • Other topics/questions.

13. Resources • National Association of Corporate Directors (NACD). NACDonline.org • 2016-2017 NACD Public Company Governance Survey • 2016-2017 Directors Compensation Report (with Pearl Meyer) • Spencer Stuart Board Index, annually. www.spencerstuart.com • MFDF www.mfdf.org • Reports and webinars on a range of topics • Mutual fund candidate database • ICI (Investment Company Institute) www.ici.org • Investment Company Fact Book, annually • Understanding the Role of Mutual Fund Directors (no date) • IDC (Independent Directors Council) www.idc.org. • Fundamentals for Newer Directors (no date) • Overview of Fund Governance Practices, 1994-2016 (Oct. 2017) With IDC. • Robert Pozen & Theresa Hamacher, 2015. The Fund Industry: How Your Money is Managed, 2nd ed. John Wiley & Sons.