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From: James H. Bodurtha
I write as an independent director and Co-Chairman of the Board of 39 mutual funds, comprised of 59 portfolios for which Merrill Lynch Investment Managers serves as the investment adviser. The total assets of these funds are approximately $38 billion. The views expressed in this letter are mine exclusively and do not necessarily reflect the views of my Co-Chair or any other director of the Merrill Lynch funds. I believe that having an independent chair as opposed to a lead director or other governance process for attending to the processes of the board serves shareholders well. The title, itself, carries with it a certain amount of apparent authority that sends an important message to all who deal with the board: the chair connotation is much stronger than that of lead director. To be sure, there is little difference between the two when interfacing with those who are daily charged with operating a fund’s business. But for other service providers, and for members of the management team who may be removed from the business of dealing with the board (e.g., technology officers), the title of chair connotes an importance that enhances the authority of the board and its dealings with these people. This enhanced authority is particularly important when dealing with outsiders to a fund complex, such as accountants, lawyers, and other parties not affiliated with the management company. A request to any of them for information or advice is treated with greater diligence when the request comes from a “chairman of the board.” I believe that notions that designating an independent chair promotes confusion between the responsibilities of management and the oversight function of a board are ill-founded. The essential element of board oversight inherent in the chair’s role is the control of the business of the board, not of the business of the management company/investment adviser. Critical to this process is the content, timing of delivery and quality of information required by the board to conduct the business of the board. Much of this information is supplied by management and a critical role of the chair is to work with management to see that the information supplied is timely given, well-organized and covers the matters for which the board has responsibility. These efforts are easily distinguishable from actual management of the business. The tougher issue for me is whether the Securities and Exchange Commission should mandate the form of governance for mutual funds. I support the notion that 75% of mutual fund boards be independent although I believe that two-thirds or more should be adequate to assure independence. I believe that well-informed directors should be capable of studying their governance and reaching their own conclusions as to how to best manage their affairs. That said, I also note that at year-end 2005, according to the Investment Company Institute, approximately $2.4 trillion in fund assets was held in 401(k) plans. In most, if not all, instances the 401(k) plan provider is chosen by the employer and not by the actual investor. As a result, the investor cannot choose only funds that have an independent chair. While I personally believe that performance is vastly more important than the form of governance of a fund, the fact that an investor is unable to direct his or her funds to a fund or fund complex with an independent chair tilts my thinking towards requiring an independent chair. To be sure, an independent chair is no assurance of good performance or even, as we learned from the recent fund scandals involving market timing and late-day trading, assurance of ethical conduct by management. But the voice of the shareholder in the board room is in my judgment strengthened by having an independent chair. When combined with the fact that many of our shareholders cannot choose the governance process of the funds in which they invest (in fact, I suspect most of them have no idea it’s an issue), I believe the Commission should implement the independent chair rule. From my experience, the cost to shareholders of an independent chair is an immaterial issue, in our case, spread over our assets, not even close to a basis point of shareholder return. Very truly yours, James H. Bodurtha |