Boards of Directors and Operational Performance

Abstract

We provide new evidence linking board characteristics and performance. We employ a sample of S&P 500 index funds to isolate the operational component of performance, thereby minimizing investment policy effects in our performance measures. Funds with higher percentages of board directors who are sponsor officers (insiders) experience higher returns and lower expenses. In the overall sample returns and expense ratios are not impacted by board size, the proportion of independent directors, or the presence of an independent chair. However, the presence of an independent chair is positively related to performance in funds where shares of the sponsoring investment firm are publicly traded. Overall, our results indicate current and recently proposed regulatory changes in board structure rules will impose dead weight costs on some shareholders and may even result in significantly lower performance.

Keywords: mutual funds, board structure, ownership structure

JEL Classification: G34, G32, G38, G20