Your Independent Fund Director and You

When I was in grade school, we didn't have Google to answer all our inexhaustible questions about a given subject. Instead, we had to learn the hard way: schoolroom documentaries. You remember them, right? A chipper narrator, over the strains of peppy Muzak, would cogently explain everything about a thorny topic, usually titled something like Nuclear Power and You.

The fact that these programs are parodied today in everything from South Park to The Full Monty stands as a testament to how oddly effective they were. For today's column, I'd like to take a page from the old schoolroom format to address a crucially important issue regarding mutual fund investors: the role of the board of directors at mutual funds, especially independent directors. Let's call it: Your Independent Director and You.

Remember, class: Independent directors are your front line of defense in safeguarding your interests as an investor -- the Securities and Exchange Commission unofficially deputizes them as watchdogs. However, most of the 95 million investors have very little understanding of the responsibilities of the 3,000 or so independent directors at funds nationwide. And, frankly, it could be said that some independent directors don't have a full understanding of their responsibilities to investors, either.

Indeed, the performance of fund directors has been attacked this year by two giants among investing luminaries: Warren Buffett and Jack Bogle. In a letter to Berkshire Hathaway(BRK.A Quote) investors, the Sage of Omaha likened fund directors to zombies in they way they rubber-stamp managers. Meantime, the Vanguard founder has deemed independent directors "lapdogs in disguise" for aligning themselves more closely with the fund firms rather than the investors they are supposed to serve.

The widening scandal regarding fund firms allowing abusive trading of funds raises the question, "Where were the independent directors and should they have prevented this?" Nonetheless, other industry watchers insist the system has been hugely successful in its 63 years, even if it needs improvements. "Mutual fund boards actually work, maybe not as well as they will in the future," said C. Meyrick Payne, senior partner at Stamford, Conn.-based fund industry consultant Management Practice Inc. "It didn't work well this time, and it's a dreadful thing. But the worst thing that could happen is for everyone to say, 'See, I told you it didn't work' and get rid of directors."