Company AGMs

are a charade

and voting by

show of hands is

farcical

SHRIRAM SUBRAMANIANFounder and MD

Special Feature Shareholder Activism

The emergence of proxy-advisory firms in India opens a new flank in shareholder activism. Naren Karunakaran reports how

they could induce greater involvement of institutional investors in company matters and foster better governance practices

The Proxy Voice of Investors

an we ever show the door to a company’s founder, in the manner Steve Jobs was by his board? Will we ever see an Apple in India?” These were questions

breezing through the mind of Anil Singhvi, former managing director of Gujarat Ambuja Cements, about a fortnight ago. Singhvi is now tak-ing a stab at triggering shareholder activism through his proxy-advisory company -- a breed of firms alien to India that advise institutional inves-tors on how to vote on resolutions put forward by their companies.

And then Vikram Akula happens. The poster boy of Indian micro-finance quit SKS Microfinance, the company he founded, under intense pressure from a section of shareholders keen to steer it along a new recovery path.

It’s perhaps a harbinger to an era of shareholder assertion and a makeo-ver in corporate governance practic-es. The signs are promising, coming as it is, in the wake of a restive civil society and a clutch of businessmen pushing for renewal.

Family-owned businesses domi-nate the Indian corporate landscape. It does have its due share of good companies, but is also littered with totems of how owner-managers have enriched themselves to the detriment of minority shareholders: through complex holding mecha-nisms, creation of subsidiaries and related-party transactions, among others.

Singhvi, lately, has been railing against Piramal Healthcare. The sale of its domestic formulations business to Abbott Laboratories for $3.7 billion in September 2010 is criticised for its lack of transparency. “The promoter also arrogated to himself almost Rs 350 crore for facili-tating the deal,” he explains.

In this backdrop, the number of equity investors has remained static over the past 20 years. “Retail inves-tors are scared of entering the mar-ket,” says Singhvi. “Trust and faith are sorely lacking.”

“The entrenched holding company structure in India inherently makes good governance practices more dif-ficult, perhaps conveniently so,” ex-claims Mahesh Krishnamurti, man-aging director of Resources Global Professionals (India), a professional services firm. “Good governance goes much beyond ‘tick all the boxes’ approach and resides mostly in per-sonal ethics and integrity.”

Corporate governance issues are evidently permeating out of boardrooms and academia into the wider, public domain. And, now, entrepreneurs also spy a business opportunity in holding companies to account. Over the past year, new entities described as ‘proxy-advisory firms’ or ‘voting-solutions firms’ have joined the firmament of invest-ment bankers, financial advisors, brokerages, equity analysts, et al, that serve companies, institutions, investors and markets.

Institutional Investors Advisory Services (IIAS), launched by Singhvi, and InGovern, promoted by the Bangalore-based Shriram

Subramanian, are already creat-ing ripples, if not waves, in corpo-rate India. The flurry of vote rec-ommendations issued by this duo is beginning to sting and shame company managements. It’s being hailed, and is also, expectedly, causing concern among certain quarters. A senior executive from ITC recently called Subramanian to find out what his recommenda-tions were for the resolutions that come to vote at the company’s an-nual general meeting (AGM)

PASSIVE SHAREHOLDERS

Companies listed on stock exchang-es have to report to shareholders. This happens through the AGM. Shareholders are issued notices (proxy statements) or resolutions that will be put to vote -- from the routine approval of accounts to vital business issues. Shareholders may either vote in person at the AGM or through proxy.

All along, company managements have had an easy run at AGMs as most minority shareholders with a significant holding -- like financial institutions, mutual funds, foreign institutional investors -- preferred to be mute spectators. Inconvenient questions are rarely raised and reso-lutions are passed without much ado, usually by a farcical show of hands. “AGMs in India are a charade,” says Subramanian.

Earlier, much of minority share-holding was with financial institu-tions. If managements had influ-ence with the political establish-ment, no trouble could be expected from these institutions. “The hallmark of LIC’s (Life Insurance Corporation) AGM participation is absenteeism,” says Singhvi.

The last decade or so have seen hedge funds and private equity firms investing in India. But even they aren’t exactly pushy on governance reforms because the dominant out-look is not necessarily long-term. So, governance falls off the radar. “Unfortunately, even our mutual funds are beginning to behave like hedge-fund managers, churning their portfolio every other day,” la-ments Subramanian.

Both Singhvi and Subramanian agree that our markets need more depth and meaning. It can come only with serious, long-term pension players, in the league of a California Public Employees Retirement System (CalPERS), making invest-ments here.

The signs, however, are encourag-ing. Pension money is trickling into the market. Sebi, the capital market regulator, is also pushing for increased transparency to benefit shareholders. It now decrees that all mutual funds have to report how they have voted on resolutions at company AGMs. In fact, this was the trigger for Subramanian to launch his firm last year. Even companies now have to report on how its share-holders voted at the AGM immedi-ately after the event.

ACTIVE PROXY-ADVISORY FIRMS

We, therefore, have a situation where scores of institutional inves-

tors who have invested in scores of Indian companies have to neces-sarily read through hundreds of resolutions, study them, and vote for, against or abstain.

Even if they wanted to do this, they do not have the time, people or the expertise to do so. The problem has reached gigantic proportions in the US. One public pension fund was called on to vote on 8,154 resolutions at 2,738 shareholders meetings in 2009 alone! Solution: outsource to an independent agency.

Enter proxy firms. They wade through proposed resolutions of companies, apply governance and other screens, and recommend a ‘for,’ ‘against’ or ‘abstain’ on each of the resolutions, with a clear explanation on the reasons why. They may also attend AGMs as proxy.

Institutional investors pay the proxy firms for their research and vote recommendations, though it’s not necessary they follow the advice. But if they don’t, they expose themselves to certain risks. Say, an investor had the proxy advice, and yet voted contrary to it. If later a pub-lic controversy on the issue voted on breaks out, those adversely affected

can sue the investor. “Luckily, India is not a litigious soci-ety, at least in the corporate sense,” says Subramanian.

It is not uncom-mon for mutual funds, especially debt funds, to seek investments from corporates.

Investors, therefore, may develop a fuzzy relationship with companies and derive certain benefits that other sets of investors don’t. Good reason for such an investor to shun a proxy firm. On the positive side, it is always better for an investor or fund to buttress its voting strategy with independent advice.

Although Subramanian is engag-ing with almost all large institu-tional investors in India, he hasn’t yet bagged too many clients. Years of calcified approaches and relation-ships are hard to break.

It’s bared by voting patterns. Subramanian, for instance, exam-ined Reliance Mutual Fund, India’s largest. Of the 1,760 resolutions the fund voted on during a period, it voted ‘for’ 1,717 resolutions and abstained 43 times. Not a single resolution was voted ‘against’. A Piramal Healthcare resolution sought shareholder approval to do-nate Rs 200 crore to charity. “Again, the fund (Reliance) abstained, when it was a clear ‘against’ vote,” says Subramanian.

Mutual funds taking a stand have been more the exception than the rule. One such is Franklin Templeton, which has expressed an opinion on a number of issues, from executive compensation (Reliance Communication, Escorts) to altera-tion of memorandum of association (Tata Motors).

By telling institutional investors how they should vote, IIAS and InGovern are rocking the corporate

status quo. For example, InGovern probed deeper into a statement by Colgate-Palmolive that RA Shah, an independent director, had a non-material relationship with it. This director, who has been on the com-pany’s board for 20 years, is a senior partner in Crawford Bayley & Co, which is also a solicitor to Colgate-Palmolive. He is also chairman of the audit committee. In the US, this would be sacrilege. InGovern’s rec-ommendation to shareholders was to vote against the adoption of the company’s accounts.

CONFRONTATIONS AHEAD

But what use are these recommenda-tions if resolutions are yet passed because promoters have a majority behind them? Subramanian thinks naming and shaming, as a first step, can propel reforms.

Singhvi believes no amount of “gyan” or preaching good govern-ance to Indian companies will change them. He would like to see mi-nority shareholders come together -- as coalitions. “When one-third of shareholding in a company speaks in one voice, it can send jitters down the spine of managements,” he insists.

In fact, Sebi is reportedly looking at ways and means to empower mi-nority shareholders like electronic voting. The stage is being set for confrontations -- for the better, for companies, for shareholders and for larger stakeholders too.

In the US, it is common for small groups of shareholders, even in-dividuals, to make proposals for consideration at AGMs, especially those relating to environment and sustainability. Termed ‘shareholder proposals’, these are different from management-sponsored propos-als. A clutch of socially responsible investors like Calvert Investments, Trillium Asset Management and Walden Asset Management, along with large pension funds and faith-based institutional investors, are active in the US.

In India, by comparison, share-holder proposals are ‘friendly’ in na-ture. These are largely related to the appointment of directors, which are basically inspired by the company management.

Proxy firms earlier disregarded en-vironment-related proposals as, they believed, it didn’t add to shareholder value. The tide is turning. Ceres, an NGO in the US, analysed proxy votes on climate change-related proposals by 46 mutual funds that managed $5 trillion in assets. The average support for these issues grew from 14% in 2004 to 27% in 2009. InGovern hopes to address sustainability is-sues, but only after it gains traction with governance.

Another significant development in the Indian context is the approval of the new companies bill by the cabi-net last week. Class-action suits are just a hop away.

In the US, proxy-advisory leader, Institutional Shareholder Services (ISS), extends to its clients securities class-action services. In 2010, the US saw 174 class-action filings. According to PricewaterhouseCoopers, the av-

erage value of settlement in class-action suits that year was $30.1 million, with $624 million being the top settlement. Although Singhvi is not forthcoming about his plans on securities class-action suits, that he is talking to a couple of legal firms is telling.

Proxy firms, globally, are gaining in traction. The US regulator, SEC, is already debating regulations for such firms. “Proxy firms only offer advisory services, not sell or buy recommendations,” says Prithvi Haldea, CMD, Prime Database. “Later, if they acquire market influ-encing strength, maybe regulation will be warranted.”

As this class of firms grows in num-bers, other dangers lurk in the shad-ows. Black sheep may enter. Proxy firms are not expected to solicit busi-ness of any kind from corporates for obvious conflicts of interest reasons. But who is to stem blackmailing proclivities?

With John Samuel Raja D

Percentage of US federal class-action suits naming particular officers or committees

Compensation committee

12

58

71

Audit committee

Director Chairman

CFO

CEO

President

6663

86

The Proxy Movers These two firms in the business of corporate governance research and proxy

voting solutions are creating ripples in corporate India

Edge: Its proprietary

framework meshes over

400 criteria. Alliance with

Broadridge, a $2 bn provider

of tech-outsourcing solutions

C

Proxy firms

wade through

proposed

resolutions,

apply

governance

and other

screens, and

give advices

InGovern Research Services

Red Flags Raised

…the US is Firmly On

US federal securities class-action lawsuits by industry

* (pharma,

medical

devices

and health

services)

28

2221

10

7

43 Others

Computer services

Telecom- munications

Financial servicesHealth*

Utilities (energy, oil & gas)

Electronics

Business services 3

Retail 2

India is Starting On a Path…

Taking A Stand Proxy-advisory firms are making themselves heard. Greater

awareness about them and rule changes (for example, the new

companies law allows class-action suits) will only increase

shareholder involvement in company matters, as in the US

Event: 2011 AGMJaiprakash Associates

Resolution: Reappointment of Sunny Gaur, a director

Management recommendation: For

Proxy-advisory firm recommendation: Against (InGovern)

Reason: Gaur didn’t attend any of the 6 board meetings held

during the year, also the last AGM

Reason: No provisioning for certain derivative losses under

dispute with banks

Wockhardt

Resolution: Adoption of audited balance sheet, P&L account,

and report of directors, auditors for FY 11.

Management recommendation: For

Proxy-advisory firm recommendation: Abstain (IIAS)

Event: 2011 AGM

Reason: Dilution beyond 10% detrimental to shareholders;

believes company should finalise future expansion plan, explain

purpose and amounts, and then seek shareholder approval

Reliance Infrastructure

Resolutions: Issue of QIP securities, issue of securities in the

international market

Management recommendation: For

Proxy-advisory firm recommendation: Against (InGovern)

Event: 2011 AGM

The $650,000 being paid by Sun

Pharma to its promoter’s 21-year-

old son is inconsistent with his age,

experience and worth

Companies like Infosys and

Wipro are also in violation of

good governance guidelines on

tenure of independent directors

Total proposals : 360

Social and environmental shareholder proposals in 2011

Source: Sustainable Investments Institute (proposals) and PricewaterhouseCoopers (class-action suits)

Environment

Other

Sustainability

DiversityPolitical spending

23 13 13 10 15

Labour/human rights

26

(FIGURES IN %)

(FIGURES IN %)

Promoter: Shriram

Subramanian; 16 years

in banking and capital

markets consulting

Non-audit fees as a

percentage of ‘total fees to

auditor’ is high, at 56.9% in 2009-

10 and 47.5% in 2010-11

Questioned why Hindalco

has had the same auditor,

Singhi & Co, since its inception,

or 50-plus years

Red Flags Raised

ANIL SINGHVIDirector

Institutional Investor Advisory Services India

Preaching

good

governance to

Indian

companies will

not work

Promoters: Anil Singhvi,

former MD and CEO of Ambuja

Cements, and Amit Tandon,

former MD of Fitch Ratings

Edge: Working closely with

the Bombay Stock Exchange

(BSE), which has picked up a

significant stake in it

ARINDAM

Crossword 4789

Dilbert by S Adams

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