Fund boards learned to value videoconferencing and accelerated the pace of their diversity programs during the past two years, but have otherwise stuck to the same evolutionary path they were on before the pandemic, according to a survey published Oct. 10 by the Independent Directors Council (IDC).
Data in the report – which reflects board conditions at the end of 2022 – showed that a third of boards continued to take advantage of COVID-era permission to hold some meetings remotely rather than in person, while 39% reported having returned to in-person-only meeting formats.
That change demonstrates how quickly fund boards can adapt to changing conditions, despite the slow pace of other changes, according to Thomas Kim, managing director of IDC.
The survey also shows an increase in the number of boards setting mandatory retirement ages, more detailed requirements to recruit new members and continuing growth in their reliance on independent trustees for board seats and leadership positions.
“If you think of independence as a hallmark of strong governance, the data does demonstrate strong independence among boards that oversee mutual funds, ETFs, closed-end funds and other registered funds,” Kim said.
“You have 94% of boards with either an independent chair or lead independent director, and an overwhelming majority of boards reporting that 75% or more of the directors on a given board are independent,” he said.
Diversity growth
An uptick in the rate of growth in the diversity of fund boards, especially among newly recruited trustees, shows the adaptability and the intentionality of fund boards determined to see change happen even when the pace is slow, according to Cynthia Plouché, who was just re-elected to a second one-year term as chair of IDC’s governing council.
The 2023 survey showed that the percentage of board seats held by women rose from 32% at the end of 2020, when the survey was last published, to 37% at the end of 2022 – after more than a decade of changes closer to half that size.
The percentage of trustees identifying their ethnic backgrounds as anything other than white/Caucasian also rose more than usual – from 12% at the end of 2020 to 17% at the end of 2022, after increases of only two to three percent in previous biennial reports.
Growth was much more rapid among newly appointed trustees, however, which demonstrates the effort fund boards have put into expanding their recruiting methods, including by listing diversity among the qualifications required of trustee candidates, Plouché said.
Women held 49% of the board seats assigned during 2022 compared to 41% during 2020 – an eight-point change over two years compared to a total increase of only nine percentage points since 2012, when boards reported appointing women to 32% of new trustee positions.
The percentage of newly appointed non-white trustees, meanwhile, jumped from 24% in 2020 to 46% in 2022 – a 22-percentage-point change in a metric that rose only 16 points between 2020 and 2015, when non-whites occupied only 8% of new trustee appointments.
Neither Kim nor Plouché credited the increases to specific IDC programs, but the association’s D&I Working Group has provided training and encouragement for several years to boards interested in attracting a more diverse pool of trustee candidates. It has also formed partnerships with training and recruiting firms to increase the number of qualified candidates and make them easier for boards to identify and recruit.
“As you look at data on gender diversity as well as race and ethnic diversity, you notice that more recent recruits do tend to be much more diverse, which is an indication of the intention of the boards doing the recruiting,” Kim said.
Retirement, turnover, structure
The number of independent directors and the number of funds they oversee have remained reasonably stable over the past few years, according to the report, which shows an average of seven independent trustees per fund complex and an average of six independents on each fund board.
The structure of boards at most fund complexes has remained reasonably stable as well.
Unitary fund-board structures that put many types of funds under the oversight of a single board continue to dominate the industry, with 88% of fund complexes reporting unitary boards and only 12 percent reporting cluster-reporting structures that give different boards oversight of different types of funds.
Boards are putting more effort into planning their composition, the retirement of current members and recruitment of new members, however, Kim said.
At the end of 2022, 71% of board complexes had an age-based mandatory retirement policy, most of which set retirement at age 76, though many also allow those limits to be overruled by a board vote.
The other alternative – retirement requirements based on limitations on years of service – are on the books of only 7% of fund complexes, which set term limits at an average of 16 years.
Retirement ages are a way to ensure a reasonably predictable rate of turnover in board membership and give boards more ability to plan what they think the composition of the board should be rather than allowing recruitment to be a response to an unexpected retirement.
“Those changes [mandatory retirement ages or years of service] indicate that boards are planning ahead with respect to turnover and are being more intentional about the composition of the board,” Kim said. “Generally speaking, you see them doing more outreach to ensure they are getting strong director candidates who would be a good fit for their boards,” he said.
