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How Bad Actors Infect Mutual Fund Boards

Dual-employed directors may not have shareholders’ best interests in mind

The Essentials

To improve how they’re governed, mutual funds install independent boards, often with executives from public companies. These “connected directors” can introduce either good or bad governance habits, a process Paul Calluzzo terms “governance contagion.” Research by Calluzzo, Toller Family Fellow of Finance at Smith, shows that boards dominated by independent directors with ties to the financial industry and shareholder-unfriendly firms and funds were all associated with negative fund governance. In this video, he discusses the implications.

Video Highlights

0:14  Our social networks have an impact on our behaviour. So it’s no surprise to think of connected directors as infecting fund boards with bad governance habits.

0:50  “Bad actor” directors come from firms with poor governance practices. They can influence mutual fund firms to develop practices that are not in the interest of shareholders. The opposite is true as well: board directors who are “good actors” can have a positive influence on firm practices.

1:30  This research offers an important message for regulators looking to “vaccinate” mutual funds from the influence of bad actors, and for firms themselves to raise their game by recruiting directors from well-managed companies.

1:58  Research shows that it is generally not a good idea to pack a mutual fund board with directors who are connected with outside firms.