Shareholder Satisfaction with Overlapping Directors

We investigate whether mutual fund shareholders are particularly supportive of “overlapping directors,” individuals who serve simultaneously on at least one corporate board and at least one mutual fund board. Overlapping directors may have a conflict of interest because of their dual fiduciary duty to both the fund and the company of which they are board members. While connected funds that share an overlapping director with a firm may benefit from such a connection, non-connected funds (not directly sharing a director with the firm) may be at a disadvantage. Nevertheless, we find that both connected funds and non-connected funds are particularly supportive of overlapping directors. Our results suggest that the benefits offered by overlapping directors to connected and non-connected fund shareholders exceed the costs from their potential conflicts of interest.  Our findings also indicate that the benefits overlapping directors offer are more valuable to mutual fund shareholders compared with other types of shareholders.

To address the question of whether connected and non-connected funds are satisfied with overlapping directors, we use shareholder votes in director elections to measure the extent shareholders support a specific director.  We focus primarily on votes cast at the fund level, which allows us to observe not only heterogeneity in the support rates at the director level, but also heterogeneity in the support rates of connected versus non-connected mutual fund shareholders. Connected funds that by definition share an overlapping director with a firm may benefit directly from such an overlapping director connection and therefore be particularly supportive of the overlapping director, especially relative to non-connected funds that do not share a director with the company. Alternatively, the benefits firms obtain from having an overlapping director may prevail not only for connected funds, but also for non-connected funds, if overlapping directors understand and promote the views and practices that are shared by all mutual fund shareholders. To the best of our knowledge, our analysis is the first to explore whether mutual fund shareholders, one of the most common types of shareholders, support the appointment of overlapping directors who bring with them mutual funds expertise.

Our results indicate that relative to non-overlapping directors, overlapping directors receive higher rates of support from mutual fund shareholders. The difference in the support rates is economically significant: The average rate of opposition to an overlapping director is 15.74 percent lower than the average opposition rate for a non-overlapping director. More important, the high support rates for overlapping directors are driven by the votes cast by connected and non-connected mutual funds, and the increased support rate of connected and non-connected funds is very similar and statistically indistinguishable. These findings indicate that mutual funds, in general, are more supportive of overlapping directors, regardless of whether the fund has a direct connection with the company. Because non-connected funds are also significantly more likely to vote in support of overlapping directors who are not on their respective fund family board, our results are not driven by funds’ tendency to vote for directors with whom they are familiar.

One potential concern is that overlapping directors receive high rates of support because they are board members of companies that are able to attract high-quality directors and not because they are overlapping directors. We address this possibility using two tests. First, we demonstrate that mutual funds are more supportive of overlapping directors relative to their non-overlapping counterparts serving on the same corporate boards, suggesting that the higher support rate for overlapping directors is not (exclusively) explained by the quality of the board. Second, we show that individuals who are overlapping directors receive higher support rates from mutual funds during the period in which they are active fund directors, compared with the period before and after their appointment. These findings suggest that both the expertise of overlapping directors and their current access to a mutual fund are associated with higher support rates from mutual funds.

If overlapping directors are superior directors due to their experiences and expertise, they may also be beneficial for and valued by other types of shareholders. To evaluate this possibility, we examine aggregate support rates for overlapping directors at the company level. We find slightly higher support rates for overlapping directors, but these results are not consistently and statistically significant. The results imply that, while overlapping directors are able to represent the interests of mutual fund shareholders, they do not necessarily represent the interest of all types of shareholders.

To better understand why overlapping directors receive enhanced support from mutual funds, we investigate the benefits of overlapping directors to mutual fund shareholders. As directors of fund families, overlapping directors are likely familiar with the governance and monitoring practices promoted by financial institutions and funds. Thus, we investigate the types of firms that are likely to appoint overlapping directors, the skills overlapping directors likely have, and the conditions under which overlapping directors receive high support rates from mutual fund shareholders.

Our results suggest that overlapping directors are appointed and supported at a high rate when monitoring may be beneficial: They are likely to be appointed to large and mature companies, which, as prior studies have argued, need monitoring. In addition, overlapping directors are likely to be appointed if they have financial expertise, which, prior studies have argued, enhances a director’s ability to monitor. Consistent with these results, overlapping directors receive particularly high support rates when serving on the boards of large and mature companies, when they possess financial expertise, and when the CEO has a long tenure. Taken together, these findings imply that mutual fund shareholders’ support for overlapping directors increases with the need for monitoring and when an overlapping director’s skills suggest she is capable of monitoring.

Finally, we inquire whether connected funds benefit from having an overlapping director on their own fund family board. Because an overlapping director has a fiduciary duty not only to mutual fund investors but also to all corporate shareholders, any preferential treatment of connected funds can be an indirect cost borne by the other corporate shareholders. To investigate whether connected funds benefit from their connections, we examine whether connected funds are particularly likely to vote in support of overlapping directors who might allow them to benefit from informed trading. We find that, when connected funds’ trades correctly predict extreme returns, these funds are significantly more likely to vote in support of overlapping directors.

In sum, our findings suggest that, while connected funds may benefit from overlapping directors by obtaining an informational advantage, the indistinguishably high support rates of connected and non-connected funds voting on overlapping directors suggest that the benefits of overlapping directors to all mutual fund shareholders outweigh their inherent cost.

This post comes to us from professors Rachel Li at the University of Alabama and Miriam Schwartz-Ziv at Hebrew University of Jerusalem and Michigan State University, It is based on their recent article, “Shareholder Satisfaction with Overlapping Directors,” available here.