There is a delicate relationship between a mutual fund’s board of directors and management.  While a board must be engaged in the success of the fund and create a partnership with management, the board must keep its primary purpose in mind:  to provide independent oversight on behalf of shareholders.  To responsibly fulfill this commitment, while also managing the challenging workload associated with it, a board should consider carefully some of the following governance issues—sooner rather than later.

Integrating Auditors Into the Board Room
Allowing auditors to participate in board meetings may provide boards, especially those with few members, with added expertise and guidance. Participation also may provide auditors with a deeper understanding of the fund. However, auditor participation at meetings could cause client/attorney confidentiality issues, as auditors will be exposed to every detail of the fund’s operations, for better or worse. Some auditors also may charge an additional fee for participation.

If the decision is ultimately made to give auditors a seat at the table, executive sessions can be used so private matters on specific issues of concern can be discussed.

Distributing Key Communications in the Digital Age
E-communications are increasingly popular vehicles for board communication. PDFs, CDs and secure websites all provide a less burdensome way to distribute and review board materials. But they also leave a digital footprint that could open the door to future risk. For example, an electronic trail may “prove” that a director only viewed board materials on a secure website for three minutes. But, in reality, that director may have chosen to print materials from the website to more thoroughly review offline. This could prove troublesome if the director’s performance is ever brought into question.

To safeguard against misinterpretations while making communication more convenient, consider diversifying board material distribution methods. Specifically, use a combination of more than one method of e-communication, e.g., a secure website and a PDF, or a PDF and a CD, etc.

Should Directors Stay Or Go?
The age-old question: Is there an age at which board members should be mandated to retire? The size and flexibility of the board in terms of experience should be key in this decision. Especially for small boards with members of approximately the same age, mandatory retirement could cause a significant disruption in service to shareholders and in board governance.

Boards that choose to impose a retirement age should plan in advance to ensure a smooth transition. This includes providing for enough lead time between board members’ retirements so critical expertise and skill sets can be transferred to a current member or replaced by a new one. Use of a governance committee also can help make strategic board recruitment and planning a priority.

Divide and Conquer Using Committees
As regulations become more complex and our society more litigious, boards and their members assume increasing responsibility and risk. Committees may help ease the burden of compliance by using a “divide and conquer” approach. Even for smaller boards where all members sit on each committee, the committee structure provides a framework for delegating, reviewing and reporting responsibilities. Commonly used committees include the audit, compliance and governance committees. Some larger funds also may divide committees by sector, e.g., equity funds, complex derivatives, etc.

Board members have a great responsibility to protect shareholders’ interests. Directors and trustees should conduct thoughtful due diligence and make full use of their chief compliance officer and attorneys to help determine the most effective way to operate.

To discuss board considerations in more detail, contact one of our professionals at 440.835.8500 or email us at inquiries@cohenfund.com.

The information is provided by Cohen Fund Audit Services and is intended for informational purposes only. You should consult with your legal and other advisors specific to your situation before taking any subsequent action.