Global proxy advisory firms are back in the news after nearly 23 percent investors voted against re-appointment of Deepak Parekh as a director on HDFC board.
The questions are being raised about regulating such firms and rightly so because in the corporate world, proxy advisory services have a very weighty role to perform.
Lets understand what these proxy advisory firms are and what they do.
What are proxy advisory firms?
Proxy advisory firms are like independent analysts, who provide advisory services to the investors, recommending them the effect of their vote in their shareholding and other corporate decisions.
They basically evaluate the pros and cons of corporate matters such as mergers, acquisitions, top appointments and CEO pay, which shareholders are expected to vote on in AGMs, EGMs or court-convened meetings.
How do they evaluate companies?
These firms engage in heavy-duty analysis of the major actions that are put to vote, and produce detailed reports advising shareholders on how they should swing to safeguard their interest. Proxy advisory firms charge fees to institutional investors and provide regular, independent voting recommendations on the companies that the latter own.
Who are these companies?
India has home-grown proxy advisory firms such as Institutional Investor Advisory Services (IiAS), InGovern and Stakeholder Empowerment Services (SES) that provide these services.
Institutional Shareholder Services Inc is a global proxy advisory firm which has a three-decade history and is often known as “the gold standard” in its field.
Why are these firms in so much demand?
Today shareholders have become an active participant of the management of the company and they wish to cast their vote in a wise manner. And to be wise, they need to be well informed about the affairs of the company and the effect of their vote on their shareholding and also the impact on the companies good governance policies.
But for the institutional investors, who have their shareholding in many companies, it’s not easy to cast their vote in every company in the efficient manner as it is difficult to keep a track of each company's performance and policies. That's when these proxy advisory firms come into picture as busy investors outsource their voting decision to an independent voting research analyst.
Do such companies face conflicts of interest?
Yes, they do and that further raises questions about the independence of their analysis. In certain cases inaccuracies in the final proxy advisory firm report may impact the outcome of proxy votes. Additionally, proxy advisory firm policies may result in illogical peer groups, which in turn result in inappropriate pay for performance evaluations.
What's the issue between the global proxy advisory firms and the HDFC board?
Two US proxy advisory firms, ISS and Glass Lewis, had asked investors to vote against the special resolution to re-appoint
Deepak Parekh as a director on HDFC board, according to reports.
Against this backdrop, noted banker Uday Kotak mentioned about global proxy advisory firms and their concentration of voting with such entities.
What has Kotak suggested?
Like local proxy services are regulated by the Securities and Exchanges Board of India (Sebi), the time has come to regulate global proxy advisory services for listed companies in India, said Kotak.
Uday Kotak, chief executive of Kotak Mahindra Bank, called for a domestic regulation of global proxy advisory companies.