Jon Carlson, Thomas Hanson, Stanislaw Maliszewski and Stephen Upton, former directors of The Yacktman Funds, have been named this year’s Lifetime Achievement Award winners. They will receive their awards at Fund Directions’ 19th Annual Mutual Fund Industry Awards on April 5 at The Mandarin Oriental in New York.
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Jon Carlson |
Thomas
Hanson |
Stanislaw
Maliszewski |
Stephen Upton |
The four directors—Hanson, Maliszewski and Upton independent and Carlson interested—fought a well publicized battle in the late 1990s against the founder and manager of The Yacktman Funds. They were unsuccessful in their proxy fight against Don Yacktman to stay on the board and ultimately were replaced. But their defense of shareholders and display of independence initiated a sea change for the industry that culminated when the Securities and Exchange Commission in 2001 adopted a set of rule amendments related to director independence and establishing certain protections for directors.
“The scenario that unfolded resulted from a fund governance framework that exalted the role of independent directors but afforded them no protection in the face of a disgruntled investment adviser,” Paul Dykstra, partner at K&L Gates in Chicago, told FD. “The SEC hailed directors as important ‘watchdogs’ charged with pursuing the best interests of shareholders. Until the Yacktman proxy fight, these watchdogs were on a leash, tethered by a broken infrastructure that impeded the true exercise of independence,” he said.
“They were probably the unsung heroes in advancing the issues for independent directors,” David Sturms, a partner at Vedder Price in Chicago, told FD. “At the time [the directors’ fight with Yacktman] got an incredible amount of press coverage, but the regulatory and business practice changes that were probably initiated by these guys haven’t gotten much attention. They were unique individuals,” he said.
The troubles between the board and Yacktman began in late 1997 when the directors and Yacktman argued over the manager’s investment style—and an apparent change in his approach to managing. Things escalated by the spring of 1998 when they questioned the ethics of Yacktman and his son, Steve Yacktman, then a stock analyst for the firm. The directors charged that father and son were in violation of The Yacktman Funds’ ethics code because they both held seats on the board of publicly traded mail order company 1-800 Contacts without gaining prior approval from the board. In the midst of this, Carlson—who set up the firm alongside Yacktman and served as its chief marketer—was fired by Yacktman and escorted from the offices by Chicago police. He then was considered an independent, rather than interested, director on the board.
From there the situation got worse. The directors expressed their displeasure at the firing of Carlson and their concerns about how the firm’s marketing needs would be met. In response, Yacktman demanded the four directors resign from the board. When they refused, Yacktman filed for a shareholder proxy vote to remove them. “Armed only with their conviction, courage and a deep-seeded belief in the importance of their fiduciary obligations, these four directors fought the battle of a lifetime, all of it uphill,” Paulita Pike, a partner at K&L Gates in Chicago, told FD.
The directors lost their proxy fight and haven’t sat on a mutual fund board since, but they have had a lasting impact on the director landscape. In February 1999, the SEC organized a “Roundtable on the Role of Independent Investment Company Directors.” It was a first-of-its-kind event and the Yacktman debacle featured prominently. A few months later, the Investment Company Institute formed an advisory group and in the summer of 1999 the ICI published the first-ever “Best Practices for Fund Directors.”
During the same time period, former SEC Chairman David Ruder—at the behest of then-Chairman Arthur Levitt Jr.—formed what now has developed into the Mutual Fund Directors Forum and the ICI formed its owned director-based group, the Independent Directors Council. Moreover, the rules related to director insurance coverage were changed to protect directors in the event they are sued by the advisor covered under the same policy.
“We talk about what the independent directors can do if they’re really dissatisfied with management and that would be not to approve the 15(c) contract, but that’s often defined as a nuclear bomb,” Ruder told FDI. “It took a great deal of courage, and [the Yacktman directors] had considerable personal expense in trying to stand up for the investors.” Calling the Yacktman case “a bright light for how things should not be done,” Ruder said Carlson, Hanson, Maliszewski and Upton displayed a level of independence and conviction that all independent trustees should emulate.
Barry Barbash, a partner at Willkie Farr & Gallagher and head of the SEC’s Division of Investment Management from 1993 to 1998, said the Yacktman directors set in motion the events that led to the most recent director-focused regulatory guidelines. “They sought to be independent, the reaction of a board in a given situation,” he told FDI.
“I think they thought that they may have lost that battle, but that they won the war in that they didn’t take the easy way out,” Sturms said.
Yacktman, for his part, has enjoyed recent success with his firm Yacktman Asset Management; he was nominated for Fund Manager of the Decade in 2009 by Morningstar.
For more detailed accounts of the events involving the Yacktman directors, please see http://money.cnn.com/magazines/moneymag/moneymag_archive/1999/04/01/257702/index.htm and http://findarticles.com/p/articles/mi_m1318/is_1998_Dec/ai_53263503/.