A recent academic study by Professors Carl R. Chen and Ying Huang determined that board quality, as assessed by Morningstar in assigning its stewardship grades, is correlated with a fund's long-term performance. The data Professors Chen and Huang analyzed led them to conclude that "board quality is capable of predicting funds' future long-term performance." For the time period analyzed by the study, Morningstar assessed board quality on the following factors: whether the board was led by an independent chairman, whether 75% of the directors were independent, whether the board consistently acted in the shareholders' best interests, and whether the independent directors had meaningful investments in the fund. (It is important to note that in 2011, Morningstar changed its description of how it assesses the board quality component of its stewardship grades. Most notably, Morningstar no longer lists as considerations whether the board is led by an independent chairman and whether 75% of the directors are independent.)
The study also concluded that manager incentives, as evaluated by Morningstar, are correlated to funds' short-term performance, but not their long-term performance. The manager incentives component of Morningstar's stewardship grades is based on the manager's investment in the funds he/she oversees and whether the manager's compensation plan rewards long-term performance or emphasizes asset growth.
For a description of the 2011 methodology for Morningstar's stewardship grades for fund firms, please click here.