Sucheta Dalal :Proxy advice: Check on misgovernance
Sucheta Dalal

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Proxy advice: Check on misgovernance  

August 24, 2011

India needs to encourage proxy services to check corporate misgovernance, but ensure that conflict, regulation and compensation issues are addressed right now, while it is still a nascent business

Sucheta Dalal

Indian companies, or rather their owners/managers, tend to be extremely touchy and thin-skinned about any public discussion regarding board decisions, role of independent directors, auditors or retirement of directors. Yet, a new proxy advisory firm—InGovern Research Services—set the cat among our corporate pigeons by openly recommending that some big-name independent directors do not deserve re-election.

InGovern issued a press release mid-July announcing its vote recommendations regarding two companies—Wipro and IDFC. Just ahead of Wipro’s 19th July Annual General Meeting (AGM), it advised against the re-appointment of BC Prabhakar as an independent director; and ahead of IDFC’s 27th July AGM, it has suggested that Shardul Shroff (a leading corporate lawyer) and SH Khan (former chairman of IDBI) should not be independent directors.

Mr Prabhakar has been a director of Wipro for over 14 years which is in violation of Clause (49) of the recommendatory guidelines of the listing agreement of stock exchanges that favour a nine-year tenure for independent directors. After nine years, directors are as good as married to the company. Shardul Shroff has been on the IDFC board for over nine years and probably has plenty of other offers to be an independent director. Moreover, he hasn’t found time to attend more than 67% of IDFC’s board meetings or its AGM last year, although he is part of the audit, risk and compensation committees. SH Khan has been on the board for 13 years.

InGovern also points out that the fees earned by the audit firm Deloitte Haskins & Sells, for ‘other matters’ is close to 80% of its audit fees. This could affect its independence, it says, and suggests that investors need to inquire into this.

So what happened? Only a couple of publications bothered to publish InGovern’s recommendations. And, as far as Wipro was concerned, the recommendation was probably just ignored. I say, probably, because a day after the AGM of this blue-chip company, it had not reported the general body’s decisions to the stock exchanges. The media, obsessed only by profit numbers, does not even bother with issues such as executive remuneration, appointment of independent directors or auditors. What better signal than this about the low importance we accord to corporate governance and executive compensation issues? We will watch what happens at the IDFC meeting... but we are not holding our breath.

Meanwhile, Shriram Subramanian, founder of InGovern, plans to watch 100 companies that are part of the Nifty and Junior Nifty (two indices of the NSE) from various perspectives. And there is plenty to watch. For instance, many companies like Cadila Healthcare do not reveal the consideration at which an acquisition is made. Will it make a difference to how institutional investors, with substantial chunks of equity, exert their rights as shareholders? More pertinently, do institutional investors or mutual funds really need a proxy advisor when they are already watching the companies they have invested in like hawks?
In the US, there are proxy advisors telling institutional investors how to vote and proxy firms to actually cast the votes on their behalf. Will this trend catch on in India? A lot depends on the success or otherwise of InGovern and, reportedly, its two other competitors, namely, the global giant ISS (promoted by MSCI) and Amit Tandon (formerly of Fitch Ratings), who are just setting up the proxy advisory business in India. Interestingly, the Securities and Exchange Board of India (SEBI) has created a business opportunity for them last year by mandating that mutual fund houses have to disclose their proxy voting policies on their websites by 31st May each year (it was 30th June as a first time this year). There is no specific timeframe for disclosing actual votes on resolutions. But if fund companies wait until the deadline, the information will have little relevance for their investors.

Indian mutual funds choose to remain publicly silent about dubious corporate decisions; objections, if any, are usually raised by foreign institutional investors. So it is safe to bet that mutual funds will farm out the job of studying corporate resolutions and voting on them to a proxy advisor. That way, CEOs and fund managers can also protect themselves from corporate wrath when they have to vote against the appointment of directors, auditors or not-so-savoury corporate dealings. What is, however, not clear is whether or not SEBI has studied global developments in the world of proxy advisors and ensured that we fix potential problems even before they crop up.

In the US, too, the proxy advisory business has been empowered by regulatory fiat that institutional investors have a fiduciary duty to their investors to vote on all resolutions (irrespective of the relevance to investors or the ability to understand their implications). All this activity happens in a small window of a couple of months when thousands of companies hold their AGMs and seek shareholder approvals on executive pay and appointment of directors and auditors.  

The power and influence of proxy advisors received a boost from the Dodd-Frank Law which mandates that US companies “with more than $75 million shares trading publicly must let shareholders cast a nonbinding vote on whether they approve of the company’s pay practices.” This meant proxy advice directly affected the wallets of top management—a backlash and disputes were inevitable.

The US proxy advisory business is dominated by two firms—Glass Lewis (promoted by Ontario’s Teachers’ Pension Fund) and ISS—and both have issued thousands of advisories worldwide on behalf of powerful institutional investors. While companies need to get a 75% approval for their resolutions, studies have indicated that negative advisories can sway as many as 20% of voters.

Worried about proxy advice wielding stronger influence in 2010, corporate America is pushing for regulation of proxy advisors and raising questions about their integrity and accuracy. Some companies, such as Disney, General Electric, Northern Trust and Tyco International, have even challenged their negative advisories. In January this year, The Center on Executive Compensation, an advocacy group representing some of the biggest companies (including IBM and McDonalds), wrote to institutional investors seeking their support in monitoring proxy advisory firms. The letter expressed concern that proxy advisors had “gained undue, and generally unchecked, influence over the pay practices of companies.” It asked institutional investors to take additional steps to ensure that “proxy advisory firm recommendations are accurate, tailored to individual companies, unbiased and truly supportive of sustained long-term returns to shareholders.” Corporate America wants the opportunity to comment on recommendations and correct factual inaccuracies before they are released to institutional investors.

The Securities and Exchange Commission has also put out a discussion paper on the issue, raising questions about accountability, ability and conflict of interest—among others. A frequent allegation about proxy advisors is that, like rating agencies, they have a conflict of interest if they accept consultancy assignments from companies. Proxy advisors, of course, deny the charge and claim Chinese walls exist between advisory and consultancy businesses.

Clearly, proxy advisory services are an important check on publicly-listed companies and can ensure that an expert and independent firm studies and comments on corporate decisions. They are also a useful counter-balance to companies packing their boards with pliant yes-men as independent directors. India needs to encourage proxy advisory services, but it is important to ensure that issues of conflict, regulation and compensation are addressed right now, while it is a nascent business. 

Sucheta Dalal is the managing editor of Moneylife. Subscribers get free help in resolving their problems with select providers of financial services. She can be reached at
[email protected]


-- Sucheta Dalal