Evergreen Funds independent board chairman Michael Scofield has told critics of fund boards at the American Enterprise Institute that if boards were abolished it would lead to “tremendous turmoil in the markets.” He pointed to the fund scandals of the 1920s when there were no boards. “We tried that model. If it didn’t work then, what makes us think it will work now?” AEI scholar Peter Wallison, who has hosted six meetings that all revolved around the question of ending boards or curtailing their powers, said that there are ways to deal with the resulting management conflicts of interest, as is happening in Europe. Wallison has talked of holding up to 10 more meetings on this topic, after which he might make recommendations for changing the law. Mutual Fund Directors Forum President Allen Mostoff said that “at the appropriate time, the Forum will speak up” in defense of independent directors. But Scofield’s comments seemed to offer a foretaste of what other directors might say later.
Scofield pointed out that just in relation to affiliated transactions “there are 10 areas loaded with conflicts of interest. We can’t possibly expect the markets to monitor them.” Who, he asked, would pick an independent auditor for funds ­ “is that something that is just going to bubble up?” How, in the absence of boards, would negligent mistakes by management, such as mispricing of the portfolio, be spotted and corrected?
Scofield attacked the premise underlying much of the reasoning at the AEI events--that investors could police bad fund managements by taking their money elsewhere. He predicted that if ever boards were done away with, newspaper headlines would say “mutual fund investors stripped of their protections.”