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.

This paper studies the impact of the 2003 SEC Regulation requiring shareholder approval of all equity-based executive compensation plans on executive compensation policies and practices at S&P 500 firms. Following the 2003 Regulation, firms with shareholder approved equity plans in place or those with strong performance, while not those with non-approved plans or weak performance, increase their equity compensation proposal submission activity. The quality of equity compensation proposals improves in the after-regulation period, and shareholders exhibit greater scrutiny and monitoring of executive compensation through increased voting rights. We find a decline in the equity pay component while an increase in the cash component of total executive compensation after the 2003 Regulation and also provide evidence that the 2003 Regulation contributes to this change in compensation structure.