On July 30, at the annual general meeting of HDFC, one of India’s well-run companies, US-based global proxy advisory firms Institutional Shareholder Services (ISS) and Glass Lewis advised big institutional investors to vote against re-election to the Board of stalwarts Deepak Parekh, Bimal Jalan and Bansi Mehta. Outrage and demands for foreign proxy firms to be regulated have followed.
Who are proxy firms or institutional advisory firms?
Market regulator Sebi has defined a proxy adviser as any person who provides advice, through any means, to institutional investors or a shareholder of a company, in relation to the exercise of their rights in the company, including recommendations on public offer or voting recommendation on agenda items. Proxy advisory firms research and dig out information about the company, its directors, and promoters, and advise institutional investors — who may have invested in hundreds of companies, and don’t have detailed information on all of them — to vote on resolutions put to vote by managements in AGMs. India has three domestic proxy firms: InGovern, Stakeholders Empowerment Services, and Institutional Investors Advisory Services (IiAS). ISS and Glass Lewis, too, are active in India.
What happened at the HDFC AGM?
ISS and Glass Lewis, which control about 97% of the proxy advisory industry in the US, advised against the re-election of former RBI Governor Bimal Jalan, chartered accountant Bansi Mehta, and Deepak Parekh. Jalan and Mehta opted out of the voting for re-election as Independent Directors after it became clear that the two American firms and a domestic firm had advised investors to vote against, and that they would not be able to secure the required 75% of votes. Deepak Parekh, Chairman of HDFC and a well-known figure in the Indian corporate sector, scraped through with 77.3% votes after the resolution recommending his re-election as non-executive Director was put to vote.
Why did the foreign proxy firms give this advice to investors?
ISS said that in addition to their Directorship at the company, Parekh and Mehta are currently Directors at eight and six public companies respectively. “Investors may be concerned whether Directors are able to fulfill their fiduciary responsibilities when they are serving on a large number of Boards, as in this case. While the demands of each Board will vary, and the capacity of each person will vary, holding the equivalent of more than six Directorships with publicly listed companies may make it challenging for a Director to devote adequate time to the affairs of each company. In view of this, a vote AGAINST the election of Deepak Shantilal Parekh and Bansidhar Sunderlal (Bansi) Mehta is warranted,” the company said. It advised investors to vote against Jalan “given that he attended less than 75 per cent of Board and committee meetings during the latest fiscal year without satisfactory explanation”.
How are proxy firms regulated?
Domestic proxy advisory firms are regulated by Sebi, which says the proxy adviser should disclose the extent of research involved in a particular recommendation, and the extent and/or effectiveness of its controls and procedures in ensuring the accuracy of the issuer data. “Proxy adviser is required to maintain the record of voting recommendations and furnish the same to the SEBI on request,” says the regulator. Foreign proxy advisory firms are not regulated in India and in most other jurisdictions.
What is the criticism of foreign proxy advisory firms in India?
Kotak Mahindra Vice Chairman and MD Uday Kotak has said, “We have seen the concentration of voting through global proxy advisory services, leading to concentration of voting power in the hands of a few global agencies. This questions the very basis of well-run, widely held companies and diversified ownership.” J N Mehta, MD of Indian proxy firm SES has said: “There should be a level playing field. Indian proxy advisory firms are regulated by Sebi. Why should not foreign firms be brought under regulation, too?”
What is the outlook towards these firms in the US?
Even in the United States, the citadel of proxy firms, there is a push for legislation to bring them under regulation. The Corporate Governance Reform and Transparency Act of 2017 (HR 4015) — which would require proxy advisory firms to register with the US Securities and Exchange Commission, disclose potential conflicts of interest and codes of ethics, and publicise their methodologies for formulating proxy recommendations — was submitted to the US Senate for consideration after approval by the House of Representatives on December 21, 2017.
Glass Lewis has said the proposed law shows a lack of understanding of how proxy advisory firms develop their research and recommendations, communicate with subject companies and other stakeholders, and manage and disclose conflicts of interests, even though they publicly disclose information on these subjects.
The New York Stock Exchange and Nasdaq have been pushing for reforms at privately-owned proxy firms. However, shareholder activist groups have been opposed to greater regulation, saying these firms play an important role in the corporate governance ecosystem.