Corporate India has seen quite a few instances of institutional investors turning more activist in recent times, be it their questioning the pricing practices of Coal India, voting against Akzo Nobel India’s merger proposal or protesting against Vedanta’s restructuring.
The nitty-gritty of a merger may be difficult for you, as a retail investor, to question. But even routine matters that come up for discussion at AGMs (Annual General Meetings) sometimes warrant questioning.
With the AGM season for 2012 beginning, here are a few issues you can watch out for and raise with the company whose shares you own.
Directors independent?
A key issue about independent directors (IDs) is how long they have been on the Board. If an ID has been on a company’s Board for dozens of years, could he or she be really objective?
This is why, according to the ‘Voluntary Guidelines 2009’ on corporate governance brought out by the Ministry of Company Affairs, a person may not remain as an ID in a company for more than six years, should have a cooling period of three years before he/she is inducted again and may not be allowed to have more than three tenures as an ID in this manner.
For example, in the 2011 AGM season, IiAS (Institutional investor Advisory Services), a voting advisory firm, recommended voting against re-appointment of IDs at Wipro and IDFC who had been on the Board for 13-14 years and against another ID, who had been at Tata Steel for 32 years.
This year, for the upcoming Bajaj Auto AGM on July 18, for instance, the firm has recommended a vote against the resolutions for the reappointment of three IDs whose tenures are in the 14-29 years’ range.
Besides, one of the several qualifications for an independent director is that he/she should not be a partner of legal/consulting firms having ‘material’ association with the company. But a February 2012 study by InGovern, (another firm providing voting advisory services to institutional investors), cites companies such as Colgate Palmolive, Asian Paints, Procter and Gamble, Rolta, Century Enka and Alok Industries, and many more, that have IDs who flout this norm. They do this by using loopholes in the law, says the study.
Agreed, the guidelines are only ‘voluntary’ and the qualifications for IDs is not part of the Companies Act. But with the Companies Bill 2011 (proposed replacement to the Companies Act, 1956) capturing both these requirements in a largely similar fashion, these will soon become mandatory to be complied with.
So check if your company passes the ‘independent director’ test.
Red flags in accounts
If there is a problem with a company’s financial statements, the auditor is expected to sniff it out and qualify the accounts before anyone else takes notice. That’s why investors must take cues from a company taking unusual action to change its auditors.
The goings-on at Resurgere Mines’ AGM last year is a good example. The original AGM scheduled for end September 2011 had, on its agenda, the adoption of accounts and re-appointment of auditors. But it was adjourned. This was because the auditors had not yet signed the accounts, and had made several qualifications in their report.
Subsequently, the auditors resigned and the notice for the adjourned AGM, to be held in mid-November, had ‘appointment of new auditors’ on the agenda.
If you were an investor in this company, wouldn’t you want an explanation at the AGM on this? Besides, the auditors too have a right to attend and be heard at the general meeting. What was their side of the story?
So read the Annual Reports you receive this year. If the financial statement of the company you have invested in is qualified, ask for a full explanation at the AGM.
Rotation of auditors
For auditors too, the ‘Voluntary Guidelines’ ask for audit partner to be rotated every three years and audit firm, every five years, with a cooling off of five years in between. But not many companies have volunteered to comply with this.
For the 2012 AGM of Reliance Industries, for example, IiAS recommended a vote against the re-appointment of the company’s existing auditors. Its report states that two out of the three joint auditors have been handling the company’s statutory audit for the past 35 years and none of them had rotated audit partners for the last five years.
These voluntary provisions have again, with minor changes, been absorbed into the Companies Bill 2011. The objective is to have a fresh pair of eyes look at the numbers. After all, who wants an encore of an Enron-Andersen? No company is too big to fail.
Compensation
A fourth issue is compensation. For auditors, an Institute of Chartered Accountants ruling puts the ratio between remuneration for audit vs non-audit services ( ie certification/consultation) at 50:50. This break-up will be available in the schedule to accounts.
As far as pay for top management is concerned, legal provisions are many. But when you are approached with a proposal to sharply increase or tweak pay for top management, you can put it through these filters:
Is the remuneration commensurate with growth in profits or operations?
Is there a component of performance-linked pay?
Does the person have requisite qualifications?
What is the hike from the previous year?
If you go through the annual report, many companies put out their remuneration policies and numbers. You can raise concerns in case these questions go unanswered or if you find, for instance, that in a year in which the company has performed badly, the CEO’s pay has sky-rocketed.
Measures to improve participation
Lack of interest, limited knowledge of the company’s affairs and geographic barriers result in thin attendance at AGMs and a virtual free ride for companies.
But a few changes to make meetings more participative and meaningful are already happening.
First is the advent of advisory firms such as InGovern and IiAS. Explanations and vote recommendations on resolutions at AGMs, other meetings and postal ballots for hundreds of companies are available on the web site itself.
So if you don’t understand the matter coming up for voting, hit these web sites to make an informed choice.
E-meetings
Two, the government has allowed e-meetings and e-voting for shareholders. When you receive the notice for the AGM this year, read through it to see if it talks about participation through a videoconference facility from your city/town. The rules on this say that companies could provide such facilities in at least five centres across the country.
E-voting
Three, SEBI has very recently made e-voting mandatory in postal ballots for the top 500 listed companies.
Whether it involves selling a substantial part of the business, going into unrelated areas or increasing borrowing limits, significant corporate decisions are often made on the basis of postal ballot results. But postal ballots often attract poor investor participation. Votes are further lost in mail or invalidated.
The move to an electronic system will improve participation as you could just log in and vote at your desk.
There is no scope for manipulation and companies too may become a bit more careful before they put a decision to vote through this process.
E-voting services are provided through depositories such as NSDL and CDSL. They will send your e-voting user ID and password to your email address, using which you can log into the e-voting system in their web sites. NSDL also gives regular updates on the resolutions that are currently open for voting.
vardhini.c@thehindu.co.in