An Empirical Examination of Sponsor Influence over the Board of Directors

Investment funds have a unique organization structure in which a fund's board of directors frequently contracts the management of the fund with the fund's sponsor but has a fiduciary duty to act in the interest of the fund's shareholders with regard to decisions such as the shareholder fees charged by the sponsor to manage the fund. For a large sample of closed-end funds, my findings indicate that sponsors exert considerable influence over the board of directors through a variety of mechanisms such as the installation of a sponsor-affiliated board leader, director compensation from service on multiple boards for the sponsor, and control of the director selection process. Furthermore, my examination of closed-end premiums indicates that the market perceives that the absence of sponsor involvement in the director selection process is a credible signal that new directors are not "hand-picked" by the sponsor and that this attribute is positively priced by the market. Copyright 2003 Eastern Finance Association.