Tuesday, April 11, 2006

Independent directors on mutual fund boards: Part 2

This post analyzes the evidence from studies that have examined the importance of an independent mutual fund board.
There are two primary studies which look at the importance of board structure of mutual funds.

The most recent study (and the study that uses the most comprehensive dataset) was presented at the AFA this January in Boston. This paper by Drs. Ding and Wermers sheds light on the current controversy about the independence of mutual funds boards. This is what they have to say:

"When we examine the role of boards, we find that higher numbers of independent directors predict both better future performance and a higher likelihood of underperforming manager replacement, which indicates that the structure of the board is an important determinant of governance quality. "

In an older study, Tufano and Sevick (1996) find that smaller boards and a higher fraction of independent directors are associated with lower mutual fund fees, indicating that smaller boards with higher independence are more effective in dealing with agency conflicts.

So once again, the SEC's idea was a sound one, only the implementation may have been lacking.

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