Corporate Governance Through Shareholder Activism, Bengaluru

Why do we find disparities in valuation between the top 50 publicly traded companies and the others? To Shriram Subramanian, founder of InGovern – India’s first proxy advisory firm, a broadly encapsulating factor is inadequate corporate governance. Shriram’s intriguing discussion at the Bangalore Chapter of Indian Association of Investment Professionals highlighted major concerns with the current corporate governance framework related to publicly traded Indian companies and possible solutions to address them.

To elaborate, the bi-polar nature of the market, in which some companies are over-valued and others under-valued, is attributable to the current corporate governance culture in the country. To him, improving the corporate governance culture in the country would mean an increase in the investable companies from 50 to about 500, thus resulting in a less volatile environment and an increase in the breadth and depth of the stock market. Here follows an elaborate discussion:

InGovern’s Research:

The following concerns were highlighted in the InGovern’s research for the fiscal year 2012-13:

• Institutional investors such as mutual funds abstained from voting in an astonishing 51.5 percent of the resolutions passed by the investee companies
• A meager 431 out of 29,290 resolutions have been voted against at these meetings
• Two mutual funds were non-compliant with Security and Exchange Board of India (SEBI) disclosure norms as they abstained from voting
• Insufficient significance placed on voting policy. This is evidenced by the one page policy on voting, and
• Limited guidance on disclosure of material conflicts of interests

Further, information of transgressions at company level is provided below:

• 9.0 percent of companies were non-complaint with clause 49 of companies act; with less than 50.0 percent independent directors and no independent chairman
• 9.0 percent of directors have outside directorships in more than 10 public companies
• One in five directors attend less than 75.0 percent of board meetings
• 22.0 percent of independent directors have served on the board for more than 9 years
• Only 45 companies had audit committees comprising only of independent directors
• 13 companies have not constituted a remuneration committee
• 53 companies have had the same auditor for over five years

These observations highlight the inadequate importance placed on the corporate governance practices by companies and investors alike.

Other factors:

Other structural concerns that underscore the need to enhance the current corporate governance framework include:

• Recording votes as “unanimously approved”, creating a wrong impression in the minds of shareholders
• Use of “show of hands” as a voting method, as against e-voting for all shareholders
• Unscrupulous employees voting at the meeting as shareholders

Further, recent trend indicates that institutional investors are becoming short-term investors and thus are reluctant to participate in shareholders’ meeting.

Enforcement Concerns and Cultural impact:

The current legal framework does not support the enforcement of the corporate governance related regulations in India. InGovern’s research outlines that punishment to errant companies and managers was not a disincentive for future transgressions. The research concluded that effective functioning of institutional investors, regulators and independent directors would result in protection to minority shareholders, increase participation in the stock market and increase investable pool of companies from the current 50 or so. Thereby resulting into positive influence over the market depth and breadth, and enhancing market stability.

Changes to Corporate Governance Structure:

Some positive developments that address structural issues of the corporate governance have been implemented over the last few years include:

• New SEBI disclosure guidelines on proxy voting by institutional investors
• Enhancement in the scope of the voting to include Foreign Institutional Investors who hold American Depository Receipts/Global Depository Receipts
• Requirements of disclosure of voting patterns after meetings by the companies
• Government introducing the Companies Bill of 2012, and
• Mandatory public holding of over 25.0 percent for all the listed companies

Practical Scenarios:

Shriram discussed interesting case studies and provided specific instances of how prominent companies erred in the corporate governance practices. Issues with independent directors, conflict of interests, related party transactions, compensation, amalgamation of unlisted promoter entities with unfair valuation, and dilution of voting rights were covered with some amazing examples.

Shriram was graceful in the way he spent two hours explaining situations in detail to a very curious and participative audience. The session concluded with a networking opportunity over the dinner.

Contributions by: Abhimanyu Lakshman and Hareesh Mothi, CFA