John Hill is taking his naysayers to task on the issue of independent chairmen for mutual fund boards. The Putnam chairman makes the case for independent chairs in a May 12 letter addressed to SEC's own chair, William Donaldson.

Hill identified areas where maintaining independence is critical, primarily fees and expenses, such as advisory fees, soft dollars, 12b-1 fees and others expenses paid to the fund's management company.

While "[i]ndependent chairpersons have no direct interest or stake in these fees and costs other than that they be fair and reasonable to shareholders[,] [a]ffiliated chairpersons...have a direct stake in the form of their own compensation or the value of their management companies" wrote Hill.

The "dollars involved in these conflicting interests are massive" stated Hill.

As a fund company with an independent chairman, industry watchers have said Putnam is exemplary -- for not preventing trading abuses even with an unaffiliated chairman.

Although Hill did not address this criticism directly, he wrote that looking at the list of the 19 firms targeted by the SEC is proof positive that interested directors do not fare much better. Hill also fired back by noting that it is not the board's job to police the day-to-day activities of thousands of employees.

Opponents of the measure, including industry leaders testifying during the Senate Banking Committee's mutual fund hearings in late March, have argued that independently chaired funds often have lackluster performance. Hill countered that the studies supporting that conclusion are statistically flawed due to small sample size (not enough funds with independent directors) and time period studied.

John Brennan, Vanguard's chairman and chief executive officer, on a panel at the ICI meeting last week, characterized the independent chairman proposal as a change that would be "cosmetic" and "nominal."

Along those lines, Robert Dow, managing partner of Lord, Abbett & Co. and also a panelist at ICI meeting, questioned whether there is an effective difference is between a lead director and an independent chairman. Dow also said the proposal may lull people into a "false sense of security."

Hill, in a conversation on Tuesday, countered "if [the difference is] only semantic, why are they fighting it so hard?"

The SEC's Director of the Division of Investment Management, Paul Roye, also weighed in on the issue last week at the ICI. "Is that the ultimate fear of this proposal...that the independent director would have too much power?" Roye questioned the audience. Roye condemned affiliated directors: "divided loyalty is not an excuse for unethical behavior."

The industry resistance to the proposal has been heavy: "I don't think I've seen a lobbying effort of this magnitude since last year [in 2003, when the SEC proposed making proxy votes public]" said Hill in a conversation on Tuesday.

Why the stalwart opposition? Hill noted that leadership at companies like Fidelity and Vanguard that have built up their companies from the bottom feel a right to be chairman of their own company.

Will the proposal pass at the SEC? On this last question, Hill declined to venture a guess.  

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