* PIMCO lowers threshold to nominate directors
* PIMCO had mediocre Morningstar grade for stewardship
* Fund board could reject shareholder nominees
By Ross Kerber
Dec 5 PIMCO is making it easier for shareholders
to nominate trustees to the board that oversees star manager
Bill Gross's giant bond fund and dozens of other offerings,
drawing praise from analysts and academics concerned about fund
The move could help PIMCO to improve the middling grades it
has received for its fund stewardship. But it also could heat up
the ongoing debate over just how much oversight fund boards
Under new rules which apply to Gross's $281 billion Total
Return Fund and some 82 others, a fund shareholder
with at least $25,000 invested for two years can seek to
nominate someone for the board of trustees.
Previously, shareholders had to meet a much higher threshold
to nominate a board candidate, owning at least five percent of a
fund for two years. The firm also did away with a few other
minor restrictions on shareholder nominations.
The changes make it much more practical for an average fund
shareholder to nominate a trustee, according to Morningstar
senior analyst Eric Jacobson.
"This dramatically increases the possibility that someone
could reach the threshold to make the nomination," he said.
Morningstar has assigned PIMCO's funds an overall
stewardship grade of "C," lower than grades for competitors like
American Funds and Dodge & Cox, which each got an "A." The
seven-member PIMCO Funds board includes five independent
trustees and two who work for PIMCO. Brent Harris, the board's
chairman, is a PIMCO managing director.
Despite the reduced threshold for making nominations,
PIMCO's fund board does not have to accept shareholder
candidates, Jacobson cautioned. "The board still has tremendous
discretion," he said.
Newport Beach, California-based PIMCO, which is short for
Pacific Investment Management Company LLC, provided no
explanation for the new rules, described in an October 23
securities filing. The firm oversees a total of about $1.8
trillion in mutual funds and in accounts for institutional
Spokesman Mark Porterfield said PIMCO executives were not
available to comment. Several independent trustees on the fund
board did not return messages.
Mutual funds are owned by their shareholders and, in theory,
fund boards should represent shareholder interests above all
else by seeking lower management fees and otherwise pressing
sponsoring companies for better deals.
But in practice, fund boards are dominated by fund sponsors,
one reason that the boards hardly ever invoke their power to
fire fund management companies.
The Securities and Exchange Commission aimed to make fund
boards more independent in 2004 when it passed a rule requiring
funds boards be chaired by independent directors. But many fund
companies objected and the rules were tossed out by a court in
2006. The SEC did not press further.
Also, market competition from the rising popularity of
low-cost exchange-traded funds has helped check mutual fund
costs, reducing pressure for regulatory changes.
Industrywide, fund boards have largely escaped the wrath of
activist shareholders more focused on publicly-traded companies.
One reason is that fund boards rarely hold public annual
meetings, reducing opportunities for protest and keeping board
members out of sight.
LESS RESTRICTIVE RULES
Analyst Jacobson said that he sampled about ten of PIMCO's
largest competitors but found no others with rules as
restrictive those PIMCO did away with. PIMCO's prior rules
seemed based on those common to closed-end funds, which
traditionally make it harder to nominate directors as a way to
fight takeovers and similar events, he said.
The shift could help attract more customers, University of
Michigan finance professor E. Han Kim said. The change "will
make them look good to investors," Kim said. "It's low-cost
advertising from their perspective."
Kim agreed that the change alone may not lead to a reform
for PIMCO's board. Just making it easier for shareholders to
nominate themselves or other candidates does not mean they will
be chosen, he said.
The change could have been put in place just to make it
easier to put a preferred candidate of PIMCO's own on the board,
noted William Birdthistle of the Chicago-Kent College of Law.
"Maybe PIMCO has a good friend who wanted on," he said.