Self-interest of Independent Directors and Liquidations of Mutual Funds

Abstract

Independent directors are appointed to represent the interests of mutual fund shareholders. Yet, being in the employment of fund–families, the fulfilment of fiduciary duties of independent directors may be compromised. Using a large, hand-collected dataset of over 10,000 U.S. mutual funds, we analyze the impact of the degree of alignment of independent directors’ interests with those of shareholders as opposed to those of fund–families on liquidation decisions. We find consistent evidence of our hypotheses that alignment with fund–families dilutes the incentives imposed by the alignment with shareholders in retail funds. We also find consistent evidence that the alignment of independent directors with shareholders has positive effects only in institutional funds. These results have important policy implications which are discussed in the paper.

Keywords: mutual funds, liquidations, independent directors, self-interest, boards, retail investors, institutional investors

JEL Classification: G23, G34, G01