Saturday, September 30, 2017
Earlier this week, the Wall Street Journal reported that many institutional investors – including large mutual fund complexes like BlackRock and State Street – have become concerned about “overboarding,” namely, the phenomenon where corporate directors sit on multiple boards.
There are good reasons to be concerned. Researchers have found that in many, though perhaps not all, cases when corporate directors are “overboarded” – and thus presumably unable to devote their full attention to governance at particular companies – companies are less profitable and have a lower market to book ratio. (Similarly effects are found for distracted directors.)
That said, there’s a particular irony in seeing mutual fund companies, of all investors, leading the charge. Most mutual fund companies employ a single board – or a few clusters of boards – to oversee all of the funds in the complex. This can result in directors serving on over 100 boards in extreme cases. State Street’s Equity 500 Index Fund, for example, reports trustees who serve on 72 or 78 boards within the complex. BlackRock’s Target Allocation Funds have trustees who serve on either 28 and 98 different boards (depending on how you count).
I’ll admit this is something of a cheap shot: presumably each fund is much more similar to the other funds than are the various companies at which overboarding concerns are raised. Still, when you get to over 20 funds per director, that’s a lot, no? Or 50 funds? Especially since the funds have varying interests – they might stand on opposite sides of a merger, or invest at different levels within a single firm’s capital structure, or compete for limited opportunities like IPO allocations and pre-IPO shares. Different funds might even be differently invested in firms within an industry, and thus have divergent interests regarding competition between the firms. (Cf. Jose Azar et al., Anti-Competitive Effects of Common Ownership). Not to mention the fact that the independent directors of a mutual fund are supposed to be the fund’s “watchdogs” against exploitation by the sponsor, but service on multiple boards - with associated salaries - may cause the relationship to become suspiciously cozy.
Point being, the overboarding concern is a real one. But… I’m not quite sure BlackRock is the right face for the resistance.