Circuit Breaker. Who’s in charge of governance?

With institutional investors cobbling together a jugaad solution to the Infosys boardroom battle and anointing a new chairman with the founder’s blessings, the key protagonists to this drama seem to be settling down to a good night’s sleep. The analyst community has promptly put out reports welcoming the “return of stability”. Domestic institutions are happy that the stock price fall has been stemmed. The founder has expressed confidence that the new chairman will uphold the highest standards of governance. And SEBI, which was “closely watching” the stock, has probably turned its attention to other pressing matters.

But as the dust settles on the issue, it is remarkable how little information public shareholders still have on the governance issues that precipitated this face-off. This is unfortunate because, if the battle at Infosys is to have such an unsatisfactory ending for public investors, there’s little hope that future conflicts at India Inc will turn out any better.

That the incidence of boardroom conflicts between promoters and managements will rise from here, is a given. A few years ago public shareholders in Indian companies relied mainly on the promoters’ skin-in-the-game to ensure their wealth was protected from dubious governance practices. With promoters owning a clear majority, they called the shots on all key corporate decisions. But in recent years there has been a regulatory overdrive to reduce promoter clout at listed companies. SEBI has forced promoters to dilute their stakes in listed firms through a minimum public shareholding rule. The Companies Act of 2013 ushered in new provisions to help public shareholders strike down poor corporate decisions. These ranged from deeper disclosures on managerial pay to allowing class-action suits.

There has been a tectonic shift in India Inc’s ownership patterns too. For 1000 NSE-listed companies, aggregate promoter holdings have plummeted quite sharply from a majority 53.3 per cent (of market value) in June 2007, to 45.5 per cent by June 2017. In contrast, the Foreign Institutional Investor (FII) stake has jumped from 16.8 per cent to 22.8 per cent and the domestic institutions’ stake is up from 10.4 per cent to 11 per cent. This shift has given birth to a new breed of widely held companies that feature only minority stakes from their founders. Putting institutional investors in the driving seat should have ideally resulted in vastly improved governance outcomes for public shareholders in such companies. But instead, the conflicts around succession, managerial pay and related party deals are on the rise. And the solutions that are being found seem far from perfect.

With promoters no longer representing the majority voice and public shareholders ill-equipped to decide, the onus is on institutional investors to take an objective view on governance matters. But Indian institutional investors seem unused to and even uncomfortable with this role.

Take the instance of Infosys, where a key bone of contention was managerial remuneration. Now, public shareholders in Infosys would have found it difficult to decide if Infosys did pay out excessive severance or CEO pay. But given that Infosys featured a sizeable holding by institutional investors, either the FIIs who held a 37.5 per cent stake or domestic institutions who held 19.9 per cent, could have easily taken a considered view and made it public. With the elaborate managerial pay disclosures now required in annual reports, benchmarking Infosys’ managerial pay to TCS, Wipro, Cognizant or any of the global tech majors isn’t a hard ask.

However, after rubber-stamping the pay packages when they were put to vote in earlier years, institutions have refrained from either agreeing with, or refuting the founder’s allegations during the recent face-off. Instead large mutual fund shareholders used behind-the-scenes negotiations to rejig the board. Insurance companies, who held an even higher 11 per cent stake, maintained a deafening silence. FIIs seem to have simply sold the stock.

The founders, having flagged serious governance issues, didn’t follow due process either. If they suspected mismanagement, they could have invoked the Companies Act provision which allows shareholders with 10 per cent voting rights to call for a general meeting to remove the directors. Instead, they fought their battles mainly through the media, precipitating the resignation of the directors.

Yes, this has helped restore stability at Infosys in short order. But bringing back a former founder into a top management role offers no lessons for governance conflicts because it is not a solution that will be available to every listed firm.

It is not just in the case of personality clashes between stakeholders that institutional investors are reluctant to take a public stance. They seem to prefer to be non-confrontational even when governance decisions are actually put to shareholder vote. A BusinessLine study of the voting decisions on 18,000 resolutions by the top five MF houses until December 2016 found that these funds hardly ever voted against a resolution proposed by the management. When in doubt, they chose to abstain from voting. In 2015, a related party deal by Maruti Suzuki which proposed to transfer the Gujarat manufacturing facility to an unlisted arm of the parent, created a furore. But after a dialogue with the management, many institutions abstained from voting. With 89 per cent of the other shareholders voting in favour, the deal sailed through.

While MF participation in governance can at least be gauged from the mandatory public disclosures of their voting policies, Indian insurers, who are even larger stakeholders, are subject to no such disclosures. During the high-profile battle between the Tata and Mistry factions last year, the Tata Trusts called for a series of shareholder meetings to remove Cyrus Mistry from the boards of as many as six group companies, without citing clear reasons for his removal. Mistry in turn shot back with a clutch of mis-governance allegations against the promoters.

It was widely expected that LIC, as the largest institutional shareholder, would play a pivotal role in deciding on the issue. However, LIC abstained from the voting at TCS, and voted in favour of the resolution in other cases. The governance allegations seem to have been given a quiet burial.

Both, SEBI and the corporate affairs ministry need to do far more than watch from the sidelines. India’s new water-tight laws on corporate governance need to be used to protect minority shareholders.