Given the proliferation of large companies that have undertaken major corporate activities over the past few years, it is not surprising that investors find themselves short on time to track the implications of corporate action.
Responding to this seemingly big gap in the market space, we have seen the creation of so-called proxy advisory firms whose views inform the direction of voting by large investors, mutual funds or banks.
In addition to the fact that investors, especially mutual funds with holdings in multiple entities, are stretched for time and need such advice, is the fact that investing can itself render future judgment less objective than that of a bystander. Moreover, as the average holding period of institutional investors is rarely more than 12 months, they often may not invest in analysts who can grasp the entire raft of implications that corporate governance issues may have.
The investing fraternity is also by definition closely intertwined with their investees and their objectivity can sometimes be impaired.
Access to senior management at companies is an extremely valuable commodity for professional investors who are loathe to compromise this by engaging in contentious discussions which might result in withdrawal of such access.
Proxy advisers For this reason many companies, spearheaded by well-known individuals, have started making their presence more visible in the proxy advisory space.
A prominent Indian proxy advisory firm published a study in 2012 which highlighted several features of the Indian landscape that do not meet the gold standard of governance. They indicated that a large number out of the top 100 companies had either too few or too many directors; only 45 companies had audit companies that exclusively consisted of independent directors, and 22 per cent of independent directors had served for more than nine years. If this is the situation among those in the sunlight, it is only likely to be worse within smaller companies.
So far, proxy advisers have shown a willingness to raise the difficult questions that force managements to rethink some of their proposals. Notable instances where proxy advisers had their share of voice included the merger proposals of Akzo Nobel and Escorts respectively, and regarding the objections to the royalty being paid to overseas shareholders by prominent companies such as Gujarat Ambuja and Hindustan Unilever. Most recently they have raised questions about the leadership transition in one of India’s iconic IT companies.
A Stanford study of the impact of proxy advisers in the US indicates that the mere fact of escalating these issues results in an increase in voting against those recommendations by as much as 20 per cent. The ensuing debates lead to some degree of introspection by companies and the angularities of some of these decisions can be softened. This itself is a good outcome.
Some questions Not surprisingly, several corporates are not entirely enamoured of proxy advisers. In the US, proxies have been accused of providing erroneous advice which then require companies to incur substantial costs to correct the misimpressions so created.
In many decisions which operate in a governance “ grey area”, it is unclear whether the direction recommended by the proxy advisory firm is better than what is recommended by the management, and these recommendations may not be beneficial to shareholders.
The advisors themselves rely on incomes from clients, many of whom could be close to certain corporates.
Finally, they are themselves not yet subject to the intense dynamic of a competitive marketplace.
In the US context, the fact that a few large firms such as Institutional Shareholder Services and Glass Lewis control the majority of the proxy advisory market means they have an influence far in excess of their own accountability to regulators of shareholders.
As they punch way above their weight, there is a move by the Securities and Exchange Commission to bring some form of regulation to ensure that the advisory companies are accountable for their views.
Better less than none It is only a matter of time before similar legislation will be required in India. We must be wary of overstating the negatives of institutional structures that are clearly intended to increase transparency.
Therefore, while it can be no one’s case that conflicted or careless advice is acceptable, it is better to have somewhat inefficient proxy advisors than regulate them out of business.
One of the causes of declining retail investor faith in the market has been a general lack of transparency of the equity market system. There is a belief that retail investors incur major losses while institutional mechanisms have not necessarily stepped in to provide the level of governance required to protect them.
To the extent that proxy investors can escalate major issues of governance, it must necessarily be better than the alternative, namely pushing through major resolutions with no debate.
Proxy advisers, even if not perfectly effective in all cases, should be able to provide the comfort that there are at least some people who will ask the inconvenient questions.
In a relatively short span of about two years, these firms have shown the courage of their convictions to highlight important issues. They are here to stay.
(The author is CFO and COO, Corporate Affairs, at Tata Capital Financial Services Limited.)