Remarks by Stephen R. Lewis, Jr.
Retired Independent Chairman, Columbia Funds
Recipient of the Lifetime Achievement Award

22nd Annual Mutual Funds Awards Dinner
March 26, 2015

My thanks to George Silfen for his generous introduction, and to the selectors at Fund Directions for this honor. It is particularly humbling, since most previous awardees spent their professional careers in this industry, and I am a relative newcomer. And, I’m thankful to my friends and colleagues who perjured themselves on my behalf.

These recognitions are given to an individual, but we all know that it is a team of people who make things possible for anyone in a leadership position. I’m very glad much of my team is here this evening—first and foremost my wife Judy, who is and has been my biggest cheerleader, most severe critic, and best friend. George Silfen, an extraordinarily gifted lawyer and teacher, has been independent counsel to our board for a decade. Three of my fellow independet directors are here: Pam Carlton, Cathy Paglia and Roy Richie. Ted Truscott, an interested director and head of global asset management for Ameriprise, Columbia and Threadneedle, has brought nine of his colleagues with whom I’ve worked for years.  Finally, Susan Kalpak, the extraordinarily able Executive Assistant and resource for our board and its independent directors since 1999 is here as well.  They should all share in this honor. 

Columbia Funds have an important legacy from the former IDS, later American Express, Funds. In 1962, IDS became the first fund complex to have an independent chairman and a staff to support the independent directors. This arose because of serious conflicts with the management company, and tensions between board and management continued in various forms for many years. Former Minnesota Governor Arne Carlson became chairman of the fund board in 1999, in 2001 Jim Cracchiolo, head of American Express Financial Advisors, hired Ted Truscott as chief investment officer. I joined the board in 2002. Arne, Ted and I, along with other colleagues, worked hard to develop a more positive relationship between the independent fund directors and the management company. 

We worked to develop more positive relationships because the three of us, and others on the board and in management, understand that in many, I believe most, cases, things that are in the interest of our fund shareholders will also be of benefit to the management company. Better investment performance, larger assets under management with appropriate breakpoints in fees, first rate compliance programs, and better operating processes all benefit both parties. 

There will always be some when interests may not be aligned. However, I have had fifty-plus years of personal experience in negotiations—within the academy, within and between governments, reaching agreements on mining projects or international financial deals between governments and private companies, as well as within the fund industry.  Those experiences have led me to this conclusion: One of the principal functions of leaders is to try to frame a consideration of the issues as potential positive-sum games, where both parties can be made better off by a good outcome. Zero-Sum games, in which one party wins and the other loses, are often the way in which some individuals approach conflict.  While in elections and in sports there’s always a winner and a loser, that’s not the general situation in life. Often, in my experience, re-framing the issues involves extending the time horizon over which the transaction is analyzed.  In the case of mutual funds, we as independent directors represent the interest of our funds’ shareholders—both today’s and tomorrow’s shareholders. Every new fund we approve—and I believe most of us are asked with some regularity to approve new funds—has no current shareholders. And, with a 20% annual turnover in fund ownership in the industry, in a few years a majority of a fund’s shareholders are likely to be new to the fund.  Point in time data are not enough. 

Parallel interests of fund shareholders and management companies came to the fore in the 2005 spin-off by American Express of its Financial Advisors into what became Ameriprise Financial. When AmEx announced the spin-off, Governor Carlson ensured that the independent directors of the Funds played an important role. The board made it clear to the AmEx management that we could not approve assignment of the management contracts for the Funds to the new company unless and until we were assured that the new company had retention agreements for key staff, and that it would have sufficient resources to finance the necessary investments in the asset management business (that had not been made for a decade or more), as well as the necessary resources to meet the cost of re-branding both the new company and its asset management business. This was as clear a case as I can imagine in which the interests of management and of our Fund shareholders were, effectively, identical.  Arne led us to do the right thing for our shareholders while at the same time providing significant support for management as it negotiated the terms of the spin-off with AmEx.

Let me give another example of management and independent directors working together.  If I understand the law and regulations correctly, management is obligated to provide independent directors with any information they request that is relevant to their stewardship of the funds. Management is not required to volunteer such information. Building on the trust that Arne and Ted and I had developed between directors and fund management, we worked out a simple two-page document, known as the Principles Agreement, that now underlies all our contracts. At the conclusion of each meeting of the board, the senior member of management present warrants that they have provided to the board any and all information related to our governance of the funds, including any potential conflicts of interest. There was, as you would expect, resistance within the management company to taking on an obligation not required by law. But, in a relatively short time we did reach agreement, and Jim Cracchiolo signed off on it, much to his credit, and as a clear indication of the level of mutual trust we had established. 

The Principles Agreement has real consequences. During the financial crisis and its aftermath, the practical impact ensured, for example, that as board chair I would be one of the first persons contacted when an issue, or a potential issue, came to management’s notice related, for example, to fund performance, compliance, operations, technology or possible litigation. This early notice, in my view, enhanced the level of trust that independent directors had in management, thereby making conversations on more difficult and contentious issues easier to manage. 

Finally, let me say I am a very strong believer in the importance of board independence, including the importance of having an independent chair—for mutual funds, for operating companies, and for colleges and other non-profits. Columbia Funds policy, for example, calls for voting proxies in portfolio companies in favor of any shareholder proposal calling for election of an independent board chair.  In my view, the 2008 experience of the Reserve Fund represents the clearest case possible for an independent chair of mutual funds.  I have been surprised that neither the trade press, nor outside observers nor regulators have pointed this out.  In the week of the Lehman crisis in 2008, the same individual was chairman of, and responsible for the welfare of, both his own management company and the shareholders of the Reserve Fund.  I ask you: how could one expect any human being to give appropriate attention to the survival of his own company and to the interests of the shareholders of the funds his company managed?  This may be an extreme case, but one of my early mentors taught me that one should always “draft for the worst case;” and what could have been worse than the fallout from the Lehman collapse?

You have been good to indulge me by listening to these remarks, so I add my gratitude for that indulgence to my thanks to the selectors from Fund Directions, and to those on my team, especially those here tonight.