NEW YORK - Every year the board that runs Fidelity Investments' biggest mutual fund, Magellan, votes to pay Fidelity hundreds of millions of dollars in management fees.
Overseeing that vote is the board's chairman, Edward Johnson, who is also the chief executive and chairman of Fidelity.
In fact, Mr. Johnson is the chairman of the independent boards of 266 Fidelity funds. His daughter, Abigail, Fidelity's president, is also on the boards. Though no one is suggesting any shady dealings, critics say that kind of dual role, which is commonplace in the mutual fund business, creates potential conflicts of interest and questions of credibility.
The criticism is becoming more vocal and gaining more attention as the broad scandal over management of mutual funds at several companies spreads. Fidelity's practices are being scrutinized, like those at most major companies, and no improprieties have yet been found.
"I don't have any reason to think Mr. Johnson is doing anything wrong, but if Fidelity's interests lie one way and the fund's interest is another way, which one do you think is going to win?" said Chris Traulsen, an analyst at stock and fund researcher Morningstar Inc.
Fidelity is far from alone. At Vanguard, Chairman and CEO John Brennan is the board chairman for the 118 funds managed by his company. Until recently, similar leadership arrangements could be found at funds managed by Strong Financial Co. and Alliance Capital, two of the companies under scrutiny for improper fund trading.
The Securities and Exchange Commission is reconsidering the wisdom of allowing fund company employees to head the boards of the funds they manage.
Advocates for reform say a board led by an independent chairman is more likely to negotiate lower management fees for fund shareholders or rebuke an errant manager, a task more difficult when the person leading the board stands to directly benefit from higher fund fees or is management.
Opponents say the fuss is unwarranted, as rules require that a majority of a fund board's members be independent.
"Our view is it ought to be up to the fund board," said Craig Tyle, the general counsel for the Investment Company Institute, the trade association for the mutual fund industry.
Mr. Tyle also notes that, in many cases, board actions have to be approved by a majority of the independent directors in addition to a majority of the entire board.
Others say the real issue is the need to toughen the definition of "independent" and put teeth in the fund board's powers and liabilities.
Critics say the definition of an independent director is not stringent enough. An independent director can be anyone who does not work for the fund management company, has had no ties with the management company for two years and has no close family members who work for the management company.
That means someone such as Joseph DiMartino, the chairman of the board for 191 Dreyfus Funds, can be listed as an independent - even though he was the president and chief operating officer for the fund's manager, Dreyfus Corp., from 1982 to 1994. In return for his board services this year, he will earn $815,938, according to the company.
Funds don't always pay a fee to board directors who work for the fund adviser, such as Vanguard's Mr. Brennan and Fidelity's Mr. Johnson, but the independent directors usually make at least a few thousand dollars per board they serve on.
Still, others doubt that an independent chairman would have made any difference in the improper trading scandals sweeping the industry.
"I don't think we should change the whole way we view governance because there are a few people determined to break the rules," said Conrad S. Ciccotello, a professor at the Robinson College of Business at Georgia State University. "If we're going to regulate everyone as if they were a crook, it's going to become so costly for us to be in these types of investments."
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