SSRN-Does Governance Affect the Performance of Closed-End Funds? by Gordon Gemmill, Dylan Thomas
In the most recent newsletter there was a discussion of the SEC's recent vote to require independent chairman for mutual fund companies. While I concluded that an independent chairman was a good idea, the conclusion was based more on theory than empirical evidence. Unbeknownst to me at the time, there was research that backs the conclusion.
Gemmill and Thomas have explored the link between governance and closed fund performance. They found that "for the 331 funds listed in London, returns are negatively related to expense ratios". Moreover, "expense ratios are higher for funds which have large boards, less outside directors and low ownership by the managers. The main conclusion is that companies with small boards and more outside directors perform better."
In a nutshell, governance does matter! So while we can debate whether the outside directors should be mandated, the SEC was at least on the right side of the evidence.
CITE: Gemmill, Gordon and Thomas, Dylan C., "Does Governance Affect the Performance of Closed-End Funds?" (January 2004). EFMA 2004 Basel Meetings Paper. http://ssrn.com/abstract=493282