Mutual Fund Governance: What Works and What Doesn't?

Abstract

We evaluate three potentially effective mechanisms for strengthening mutual fund governance: board independence, unitary boards, and directors ownership. We find that more independent boards do not lower fees. Nevertheless, we find weaker evidence that more independent boards negotiate more aggressively on management fees. Funds with more independent boards are less efficient in terms of performance-expense tradeoff. We find some evidence that higher independent director incentive helps lower 12b-1 fees and fund loads. The most robust and consistent results come from unitary boards. Funds with unitary boards charge lower fees and are less likely to be indicted in fund scandals. We demonstrate that better governed funds exhibit less tournament effects. We circumvent the endogeneity problem by examining director actions and investors' preference. We find that directors from unitary boards are more active and vigilant guarding fund shareholders' interests. The reverse is true for directors from more independent boards. Investors prefer funds with unitary boards and less independent boards. Also, investors are able to integrate internal governance with external governance: performance chasing is stronger for funds with unitary boards. Our findings provide robust evidence that unitary board causes lower fees. Fund families should adopt unitary boards.