According to a new academic study released earlier this week, mutual funds perform better when their directors have significant ownership in the funds they are charged with overseeing.
"While we can't say that ownership by directors directly causes funds to perform well, our results suggest that funds with the right incentive structure in place, one that aligns the interest of the directors with those of shareholders, have better performance," said Martjin Cremers. He is author of the report, "Does Skin in the Game Matter? Director Incentives and Governance in the Mutual Fund" at the Yale School of Management.
According to the study's sample, which leveraged a database of 2001 fund holdings and director compensation at the largest U.S. stock mutual fund families, independent directors held an average of $8,058 in each fund overseen and $67,170 in total, with average total cash compensation of $137,517. Non-independent directors held, on average, $23,027 in each fund and $88,075 in total.
The study's findings include the fact that ownership stakes of independent directors matters, especially when cash compensation is relatively low. For example, the researchers said, funds with independent directors with large investments in the funds and relatively low pay, outperformed other funds on average by 3.18% annually between January 2002 and June 2004, on a risk-adjusted basis.
But ownership by independent directors only matters if non-independent directors also have some skin in the game.
"Contrary to recent moves to expel non-independent directors from the boardroom, it is exactly those funds in which the non-independent directors' incentives are aligned with those of the shareholders that we find the strongest fund performance," Cremers added.
Other findings show that the percentage of independent directors on the board had no effect on performance.
The bottom line, researchers said, is that more disclosure is needed regarding director ownership and compensation so that investors can make better decisions.