Is Your Fund's Board Watching Out for You?

Abstract

We examine the relation between the performance of mutual funds and their effectiveness in disciplining underperforming funds and safeguard shareholder interest. Mutual fund boards have a clear mandate under federal securities law to monitor potential conflicts of interest, approve fund documents, protect the interests of fund shareholders and ensure that advisors provide satisfactory returns with reasonable fees. Investor advocates argue that mutual funds allow too many directors to seat on too many boards. Directors, who usually attend between four and eight board meetings a year, are paid an average salary of $250,000 annually at the largest mutual fund companies. Critics state that millions of shareholders have already suffered the cost of poor governance, in the form of poor performance. In 2011, only 23% of actively managed equity funds beat their benchmarks. Over the past five years, 61% of equity funds have lagged the Standard & Poor's 500 index. Our results show evidence that most mutual funds take some kind of action to revert underperformance, but the majority of them are not able to beat their benchmarks three years afterwards.