In today's Finshots we talk about the rising influence of proxy advisory firms in this country
Let’s take it from the top — Who are these proxy advisory firms? What do they do? And where did they come from?
See, the biggest concern with the capital market ecosystem in India has always been accountability. Once a company decides to go public and mobilizes money from people and institutions, you’d expect them to be answerable to their shareholders. But it’s always been a bit of a hit and miss. Especially before 2010, when shareholders were expected to vote on company proposals using complicated forms and the good old mailing system. It was such a pain that even mutual fund companies (who sometimes held a sizeable stake in companies) didn’t even bother to vote on important matters. So companies often had a free hand to exercise their will even if it wasn’t in the best interest of public shareholders.
So in 2010, India’s market regulator SEBI decided to intervene. They asked these big institutions to vote on resolutions (such as CEO remuneration, appointment of directors) and make their rationale public. And with one swift move, all of a sudden these people were forced to take matters more seriously.
And that brings us to proxy advisory firms.
These firms saw an opportunity and basically went, “Hey, big investors like mutual funds, wealth management companies, insurance firms etc, may not have the time to really dig into things of this sort. They can’t be figuring out if a particular director is a good fit or if a CEO deserves a pay hike. So, we’ll do the dirty work and tell them how to make their votes count. And if they start making better decisions, it’s better for the whole ecosystem.”
And as such, an entire parallel industry rose on the back of these regulations and the introduction of the e-voting system. Since then, however, they’ve been having a significant influence on the functioning of many publicly listed companies. A while ago, they had flagged concerns regarding corporate governance issues at Zee India. Yesterday, electrical cable manufacturer Finolex faced the heat at its Annual general meeting as proxy advisory firms recommended shareholders to vote against the appointment of certain directors. Today, they’ll have a say in dictating pay hikes to directors at Jindal Steel and Power Limited.
Needless to say, they’ve been having an impact. And some might add, an impact too big. So there have been calls from some corners to rein in proxy advisory firms. And guess what? SEBI seems to have answered these calls too.
Until last year, companies had no way of fighting back. Interaction between the two parties was sparse and promoters and management teams were often left blindsided. However, after August 2020, that equation has changed rather considerably. Now, proxy advisors are required to divulge details about specific recommendations with the company as they are making it accessible to the investors.
This way company management has an opportunity to respond. They can counter and rebut the recommendations and even clarify other concerns. And the duty is on the proxy advisor to relay these additional comments back to the investors. They also have to outline any conflict of interest while making these recommendations and if all goes according to plan, SEBI may end up bagging another big win in this domain. They’ve not only offered proxy advisors enough teeth to rein in errant companies but also regulated them in a bid to curb mischief.
All in all, the hope is that these new developments will bode well for the emerging capital market ecosystem in this country and we couldn't agree more.