A tough regulatory and political environment helped justify a substantial boost in pay for fund boards during 2022, despite the downturn affecting the funds they supervised.
Fund board compensation rose an average of 6.4% in 2022, though nearly a third of boards received no increase, or saw compensation drop slightly, according to survey of fund-board compensation and governance practices that was released in May by Management Practice, Inc. (MPI), which has conducted similar surveys for 30 years.
The increase – during a year that ended with an 18% drop in industry assets under management – could be a residual impact of double-digit increases in AUM during the three previous years, but is more likely a nod to the growing challenge fund directors face overseeing a complex, rapidly changing market, according to MPI partner Jay Keeshan.
“If you go back 20, 25 years, you had open-end and some closed-end funds, mostly focused on stocks and bonds; derivatives weren’t really a big deal, so it was pretty straightforward, and if you were overseeing 10 stock funds, that seemed kind of manageable,” Keeshan said.
There was much wider acknowledgement of a difficult regulatory environment during 2022 than during 2021, for example, when fund-board compensation grew 4.3% while fund assets grew 12.8%.
“Now it is a monster task,” Keeshan said. “It is difficult for someone to have a full time job and be a director on any kind of large complex where they’re introducing a new product every quarter, some of which the adviser is still trying to understand, and the level of exposure, the amount of potential litigation and the level of talent [directors] need to handle it all is helping to drive compensation.”
During 2022 the survey involved data covering 1,836 directors overseeing 375 funds with a total of $22tln AUM, total compensation ranged from an average of $12,400 for directors overseeing complexes with three funds or fewer, to $413,218 for directors responsible for 111 or more funds.
The complexity and state of the market makes a difference as well.
Increases in compensation hovered in the 3% range during the years immediately following the 2008/9 financial crisis, but rose to between 5.9% and 7.5% during the early 20-teens before settling closer to the 5% range late in the decade.
Complexity isn’t the only factor driving up compensation
The merger or acquisition of fund complexes and reorganizations that put more funds under the oversight of a single board also drive up average levels of compensation –often by reducing the number of actual board seats available and boosting the pay of directors who are now responsible for a far larger number of funds, Keeshan said.
“In the end you get fewer directors overseeing even larger swathes of the mutual-fund industry,” he said.
There is less internal consolidation at small- and mid-sized organizations, but the economic benefits of outsourcing are fueling consolidation of board seats at that end of the market as well.
“The influence of series trusts – umbrella organizations where you pay a fee and have all the normal governance stuff handled by going under one of their boards rather than starting your own – is really growing,” Keeshan said. “It’s still small in terms of actual AUM, but you can look ahead in however many years and see BlackRock and the other top 10 or 20 firms at the top, with the vast majority of the rest of the funds under some sort of umbrella or series-trust structure.”
Levels of fund compensation depend on more than just the number of funds overseen or volume of assets under management, however, Keeshan said.
It is difficult to compare the compensation of a small-AUM fund board to a large one, for example, due to the large number of organizational, structural and product-related complexities that add to the degree of difficulty a board will face in overseeing those funds, Keeshan said.
A complex that depends on complex derivatives, introduces new products frequently and supports a wide variety of fund types, investment vehicles, sub-advisers or other third parties would have to offer a lot more in compensation to attract board candidates qualified to handle those complexities than an organization whose governance questions are more straightforward, according to a guideline on how to determine fund-board compensation developed by MPI.
Cost of oversight, makeup of fund boards
Average fund-board compensation amounted to $16.40 in expenses per $1m in AUM, compared to mutual-fund management fees and other expenses of $7.500 in funds reporting a .75% expense ratio, the report said.
Seventy percent of boards are paid with a combination of retainers and meeting fees, though 27% are paid exclusively by retainer.
Independent directors make up 83% of all fund directors, with 69% of boards reporting an independent chair as well.
Only 125 new directors joined fund boards in 2022, which equals a churn rate of 6.4% on a population of 2,000 directions nationally. Only 28% of current board members are women, but 48% of new directors are female, the report found.
The average size of fund boards increased from 4.5 to nearly 5. The average age of directors is 68, with an average tenure of 11.5 years.
