Board Structure, Mergers and Shareholder Wealth: A Study of the Mutual Fund Industry

Abstract

We study mutual fund mergers between 1999 and 2001 to understand the role and effectiveness of fund boards. Some fund mergers - typically across-family fund mergers - benefit target shareholders but are costly to target fund directors. We examine whether certain governance structures relate to whether target boards approve these mergers. Fund mergers of this kind are more likely when funds underperform and when their boards are composed of a larger fraction of independent trustees. This strong interaction effect is consistent with more independent boards exhibiting a lower tolerance of poor performance before initiating across-family mergers. This effect is most pronounced when all of the fund's directors are independent, not at the 75% level of independence required by the SEC. Moreover, while boards approve across-family mergers that lead to substantial reductions in their own compensation, more highly paid target fund boards are less likely to approve these mergers. Other structural board characteristics (in particular, board size and independent chairs) are not strongly related to fund merger likelihoods and board structure is unrelated to post-merger performance.

Keywords: mutual fund, board structure, mergers