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Fund directors have a term to describe the ultimate fix to any fund problem. They call it “the nuclear option.” Framing it in those terms, apparently, keeps directors from pushing the button when something goes wrong.

So when the board of Charles Schwab’s Laudus Rosenberg funds recently decided to liquidate the funds after an error, it was a shot heard round the industry. Fund investors, however, probably didn’t hear a sound, because these situations are few and far between, because they come out in documents and paperwork that investors seldom read and because they seldom grab the headlines.

Here’s the story, and the fallout:

In a letter dated April 15, quantitative equity manager AXA Rosenberg told clients it discovered a “coding error” that affected the information flow between its risk model and portfolio optimization process. In simplified, plain English, that means that the computer models the firm uses to run money were broken.

The letter noted that the problem was first discovered in late June 2009 and was corrected between September and mid-November, but senior investment officers did not report the trouble in a timely fashion. As a result, the firm’s board is conducting a full review; the firm’s founder and chairman has taken a 30-day leave of absence and the director of research has announced that he will resign within a year.

Further, management said it was still calculating the impact of these problems on shareholders.

AXA Rosenberg runs its own funds, mostly for institutional investors, but then acts as subadviser for funds run by Vanguard and Schwab (SCH).

Schwab’s response was of the scorched-earth variety. On April 30, the board of the Laudus funds announced that the four funds — Laudus Rosenberg U.S. Large Capitalization (AXLIX), U.S. Discovery (RDISX), International Discovery (LIDSX) and International Small Cap (ICSIX) — had stopped taking on new investors and will liquidate on July 30. Combined, the funds have roughly $2 billion in assets; the board said it will try to recover any money lost by shareholders as a result of AXA Rosenberg’s computer error, although it acknowledged that the amount recovered could be too small to even distribute back to shareholders.

At Vanguard — where the matter is still being evaluated — AXA Rosenberg is not the sole manager of any fund. It is one of two subadvisers for Vanguard U.S. Value (VUVLX) and Vanguard Market Neutral (VMNFX), and one of seven firms handling a piece of the portfolio for the Vanguard Explorer (VEXPX) fund.

Given that the Laudus board suggested that monies lost and recovered could be too small to even distribute — meaning noticeable less than a penny per share — exercising the nuclear option here might seem a bit extreme.

Just a few weeks ago, however, Schwab — Laudus’ parent — settled a class-action suit brought against it after its YieldPlus fund (SWYSX) imploded in 2008. The firm ponied up $200 million for that one, and you have to imagine it is taking no chances.

“Is it hard to fire an adviser? Yeah. That’s why board members talk about it being the nuclear option,” said Laura Lutton, editorial director in the funds research group at Morningstar. “The big question is how you draw the line in terms of impact for shareholders. You could easily argue that poor management of active funds has cost shareholders a lot more than this one case with Schwab, and that there are any number of situations where shareholders would have been better off if the board changed subadvisers or liquidated the fund.”

In the case of Laudus Rosenberg, three of the four funds got two-star ratings from Morningstar and get mostly bottom-quintile marks from Lipper Inc. Only International Discovery had an above-average star rating or Lipper scores for performance.

That kind of performance undoubtedly made it a lot easier to push the button on the funds, but it also highlights the fact that boards perhaps need to go nuclear more often.

“You can’t say that the performance was particularly good here, and that almost certainly makes the difference,” said Geoff Bobroff, an industry consultant based in East Greenwich, R.I.

“Great performance excuses a lot of problems and mistakes. Without that performance, and then throw in a problem … and it’s probably an easy decision to make.”

Bobroff noted that fund boards are, increasingly, standing up to poor managers and making changes when performance has been less than expected over certain periods of time.

Chuck Jaffe can be reached at cjaffe@marketwatch.com.

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