Are better governed funds better monitors?

Using Morningstar mutual fund stewardship grade data, we find that the governance mechanisms of mutual funds play a key role in their monitoring of portfolio firms and in their investment decisions. Mutual funds with better governance practices tend to vote responsibly on corporate governance proposals of their portfolio firms and also provide better return performance. Furthermore, these funds tend to avoid investing in poorly governed firms. The results suggest that funds with quality governance are more likely to act in the interest of their investors, and that costs associated with funds' monitoring of their portfolio firms do not adversely affect their return performance.

► Governance mechanisms of mutual funds affect funds' monitoring activities and investment decisions. ► We find that well-governed funds tend to vote responsibly on corporate governance proposals of their portfolio firms. ► Better governed mutual funds also provide better return performance to their investors. ► Funds with quality governance are more likely to act in the interest of their investors. ► Costs associated with funds' monitoring of their portfolio firms do not adversely affect mutual fund return performance.