Governance and Boards of Directors in Closed-end Investment Companies

Abstract

Boards of directors occupy a prominent position in the governance of corporations, and have been a focal point of SEC efforts to ensure that investment companies are serving the interests of individual investors. We analyze whether board structure and director independence in closed-end investment companies are related to shareholder interests in ways that are consistent with boards being effective monitors. We report that funds with relatively low expense ratios, one measure of board effectiveness, have smaller boards, a higher proportion of the board that is legally considered independent, relatively low director compensation, and charter provisions that specify remedial action if discounts become large. Evidence from our analysis of major fund decisions regarding restructuring, including share repurchases, open-ending proposals and rights offerings, is largely consistent with the expense ratio analysis. Overall, board characteristics that we identify with effective board independence are associated with lower expense ratios and value-enhancing restructurings.