Independent Directors and Favoritism: When Multiple Board Affiliations Prevail in Mutual Fund Families

Abstract

We examine whether independent directors with multiple board affiliations (IDMAs) trade off the interests of one fund relative to another (fund favoritism) or whether they benefit fund shareholders by increasing the level of the board’s expertise. Using a sample of mutual funds affiliated with the top 55 fund sponsors from 2002-2008, we find that the presence of IDMAs is negatively related to performance/resource shifting across funds within fund families. IDMAs appear to decrease fund fees, increase the return gap associated with the unobserved actions of fund managers, and facilitate the transfer of information across funds in a fund family.

Keywords: mutual fund, independent directors, multiple board affiliations, fund favoritism

JEL Classification: G11, G12, G14