Does skin in the game matter? Director incentives and governance in the mutual fund industry

We use a unique database on ownership stakes of equity mutual fund directors to analyze whether the directors’ incentive structure is related to fund performance. We find that the ownership stakes of both independent and non-independent directors play an economically important and statistically significant role. Specifically, funds in which directors have low ownership stakes, or “skin in the game,” significantly underperform. We posit two economic mechanisms to explain this relation. First, lack of ownership could indicate a director’s lack of alignment with the interests of fund shareholders. Second, directors may have superior private information on futuremutual fund performance. We find evidence in support of the incentive alignment mechanism and against the private information mechanism. Finally, our results cannot be explained by the previously documented relation between fund governance and mutual fund fees.