Due Diligence. Stand up and be counted at AGMs

From Dhirubhai Ambani's mass shareholder following to Warren Buffett’s annual shareholder letters, annual general meetings (AGMs) have helped shape investment thought.

For a shareholder, a company's annual general meeting is perhaps its most significant recurring milestone. It’s not just a scorecard-keeping forum for objective assessment of a company’s financial health, but also an opportunity for shareholders to understand and vote on the innermost workings of a company.

India's AGMs, however − at least in the recent past − have lacked the vitality to deepen confidence. A very high promoter dominance (it’s over 50 per cent of the shareholding currently) has relegated the minority shareholder to the role of a spectator, without effective voting rights for bringing change. AGMs seem to be ritualistic, vulnerable to the risk of turning into rubber stamp events for promoter control.

But this is set to change, with regulatory moves targeted at improving corporate reporting and governance. And as a shareholder, it’s your responsibility to voice your opinion on your company’s doings. Here’s what you can do as a shareholder when an AGM − or any other resolution − comes around.

The Securities Exchange Board of India's August 1 circular ticked off companies that have been allotting just 15 minutes for their AGMs. The regulator has recommended enhanced monitoring mechanisms for exchanges so that corporate governance standards are followed both in letter and spirit.

But barring a few incidents, the Indian AGM season this year has been uncontroversial.

Earlier last month, Tata Motors' promoters lost out on their executive compensation resolution to shareholder activism, though the company AGM held later was fairly quiet.

Over the next financial year, the new Companies Act and SEBI initiatives could significantly enhance the reporting environment and corporate governance culture in India.

As a shareholder, you can benefit immensely from these changes. The e-voting route now made mandatory for all listed companies (fully effective from December this year) is an easy way to get around the problem of having to attend the meeting in person or sending a proxy. So what can you do to prepare for AGMs?

Before an AGM can take place, a company is required to send a notice to its shareholders for conducting the AGM along with a copy of the company's financial statements, proxy forms and items of special business that the company would like to transact at the AGM.

Try to understand the results and build a critical appreciation on the company's overall performance. Read up key parts of the annual report − such as the management’s explanation of operations, the business environment, future plans and so on. Know the name of the chairperson and directors so that you can direct questions at them.

Formulating well-considered questions and sending these questions in advance to the company can give the management time and space to prepare a response. You also have the right to request the inclusion of an item on the agenda through prior notice.

The second aspect is about discussions on issues and shareholder voting rights at the AGM. With regard to general conduct and discussion on various issues, try to promote constructive engagement with the company – for example, obstructive behaviour or frivolous questions can make the AGM counterproductive. You can propose amendments to certain resolutions (as prescribed by law), or ask for a poll on any item on the agenda.

Voting is another important mechanism for exercising your views. Nomination and election of board members and management compensation are key corporate governance decision points where your vote can influence the outcome.

In a routine AGM resolution, a simple majority of the votes cast is required. But events such as takeovers need a special resolution and a 75 per cent winning vote.

Finally, put in the effort to review investment concerns in view of the documents shared by the company before the AGM. Researching important financial indicators − from performance to growth, profitability, market share, operations, risk, related party transactions and accounting policies − can help you understand the sources of risk and return more clearly.

Of course, judging financial performance is a function of both knowledge and experience. But at a minimum, you can view the company’s key financial attributes, both as absolute benchmarks, as well as relative to the company’s peers.

The writer is Member, IAIP and Adjunct Faculty, SP Jain Institute