Does Skin in the Game Matter? Director Incentives and Governance in the Mutual Fund Industry

Abstract

We use a unique database on the ownership stakes and compensation of equity mutual fund directors to analyze whether the directors' incentive structure is related to fund performance. We find that governance plays an economically substantial and statistically significant role. The ownership stakes of both independent and non-independent directors matter for fund performance. Further, the various governance variables interact: funds with high director ownership outperform those with low director ownership only when director compensation is low, and ownership by independent directors only matters when non-independent director ownership is high. We find that funds with high director ownership are better able to continue to perform well than funds with low director ownership. Our results cannot be explained by the previously documented relation between fund governance and mutual fund fees. We also provide evidence that the relation between fund performance and director ownership is not due to directors ex-ante picking the best performing funds.