Mutual Funds as Monitors: Evidence from Mutual Fund Voting

Abstract

We address whether mutual funds act effectively as monitors through the proxy voting process by supporting wealth increasing items. We examine 213,579 voting decisions made by 1,799 mutual funds from 94 fund families for 1,047 shareholder proposals voted on between July 2003 and June 2005. In general, mutual funds vote more affirmatively for potentially wealth increasing proposals and funds’ voting approval rates for these beneficial resolutions are significantly higher than those of other investors. Our results suggest that funds tend to support proposals targeting firms with weaker governance. We also find that funds with lower turnover ratios and social funds are more likely to support shareholder proposals. Additionally, fund families display divergence across fund voting decisions on shareholder proposals. Finally, fund voting approval rates significantly impact whether a proposal passes and whether one is implemented. Our findings provide support for mutual funds being effective monitors.

Keywords: Proxy voting, mutual funds, corporate governance, shareholder proposals

JEL Classification: G32, G34, J33