Shareholder engagement : Adapting Global Practices To The Indian Context


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This presentation examines the global trends in shareholder engagement and explores how some of these practices have been applied / can be applied in the context of Indian business environment given the difference in the legal, regulatory and structure of Indian companies as compared to companies in the west.

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  • Clause 114 – Ordinary and Special ResolutionsClause 110 - Passing of resolutions by postal ballotClause 108 – E Voting
  • Shareholder engagement : Adapting Global Practices To The Indian Context

    2. 2. Excess intervention may result in dissipation of management time and short term profit orientation Shareholder Involvement Degree of Shareholder Involvement ‘Appropriate level’ of Shareholder engagement is a subjective issue
    3. 3. Management and board have responsibility and accountability towards shareholders. Role of Boards, Management & Shareholders • Shareholders are the providers of capital to a business. • Management makes use of the capital to run the business. Executive directors manage and control the business on a day-to-day basis. • The board of directors oversee management to ensure that it is allocating capital appropriately. Non-executive directors are the independent representatives of shareholders on the board.
    4. 4. Purpose of Corporate Governance • To adhere to the principles of accountability, fairness and transparency in corporate dealings. • To facilitate the functioning of an enterprise in a sustainable manner to aid long-term value creation. • To ensure fair treatment and payout to all stakeholders in proportion of their investment.
    5. 5. Dimensions of Shareholder Differences Beyond the principal agent problem between shareholders and management, there is a generalized agency problem among shareholders. • Size / influence/ style • Access to information • Time frame of investment • Portfolio weight of investment Investors are NOT a homogeneous group
    6. 6. Passive Active Combative Collaborative Short term approach Long term approach Shareholder Engagement Approach Shareholder Engagement Approach
    7. 7. Scope of Shareholder Engagement Shareholders have a legitimate role in • Corporate Strategy –mergers, diversification, restructuring, non core asset sale. • Capital Structure –capital allocation discipline, use of cash on balance sheet. • Governance –audit-related issues, board structure, managerial remuneration. • Shareholders are not expected to micromanage companies. • Should not push for short term profitability over sustainability HOWEVER
    8. 8. Global Trends in Shareholder Engagement • Disclosures. • Shareholder voting. • Shareholders say in appointment of directors and auditors. • Shareholders say in remuneration of the directors. • Shareholders‟ approval of related party transactions. • UK Stewardship Code. • Shareholder engagement through intermediaries
    9. 9. Disclosures • Recognized as the key determinants of good governance. • Disclosure requirements vary across countries. • Generally disclosure are required about • the qualifications of directors and director nominees. • compensation consultants‟ fees and conflicts of interest. • relationship between a company‟s overall compensation policies and its risk profile.
    10. 10. Shareholder voting • Shareholder votes are required on management proposals such as for the election of directors, ratification of the auditor, approval of equity-compensation plans, say-on-pay, anti-takeover protections etc. • Statutory voting is the most common and the default method for voting. Under „statutory voting‟ each shareholder is entitled to one vote per share and votes must be divided evenly among the candidates. or issues being voted on. • In contrast, with cumulative voting, a shareholders can accumulate votes for their preferred candidate. This improves minority shareholders' chances of influencing voting outcomes. • Countries including USA, Italy, Russia and China have adopted cumulative voting for appointment of directors.
    11. 11. Shareholders‟ say in appointment of directors • Historically the board of directors had the sole authority to nominate candidates whose names appeared on the proxy. • In 2010, the Securities and Exchange Commission (SEC) of the US adopted proxy access rule that allowed stockholders owning 3% or more of a company‟s shares for at least 3 years to include their own director nominees in the company‟s proxy materials. The rule was challenged in court and was struck down by the D.C. Circuit Court in 2011. • SEC facilitated proxy access on a company-by-company basis, if shareholders wanted it. • Proxy access gives investors more influence in the director election process and is likely to increase the influence of activist investors over boards.
    12. 12. Say on Pay • Shareholders are given an advisory (non binding) vote on executive or director compensation. • In the US, companies must provide a separate advisory vote regarding certain “golden parachute” arrangements in connection with a merger, acquisition, or other disposition of all or substantially all, assets. • Variations of say on pay have been enacted in UK, Netherlands, Australia, Sweden, Norway.
    13. 13. Shareholders‟ approval of Related Party Transactions • Related party transactions (RPT) are self dealing transactions by corporate insiders that can either be management, board members and/or controlling shareholders. • Abusive related party transactions present a corporate governance challenge. • The regulatory frameworks covering RPTs vary widely across countries, depending on the ownership structure and cultural and legal background. • Many countries make use of independent board members and audit committee to approve transactions, particularly those regarded as material and non recurrent, or on non-market terms. • In the US, United Kingdom, Australia, Hong Kong [China] shareholder approval is mandated for non-routine transactions. Some other economies such as Canada, France and Italy have further adopted provisions for approval by non-interested shareholders.
    14. 14. UK Stewardship Code • The UK Stewardship Code implemented by Financial Reporting Council (FRC), the independent regulatory body in UK, sets out the principles of effective stewardship by investors. • The Code lays out the requirement for having a clear policy on voting and disclosure of voting activity and monitoring and engaging with investee companies on matters such as strategy, performance, risk, capital structure, and corporate governance. • The Code assists institutional investors better to exercise their stewardship responsibilities, which in turn gives force to the “comply or explain” system.
    15. 15. Intermediaries for Shareholder engagement • Proxy Advisory firms analyze corporate proposals placed for shareholder approval and give their recommendations regarding the proposals. • Small investors generally lack the resources to analyze all proposals. • Large investors may want a second opinion. • Activist Institutional Investors use their ownership positions to actively pursue governance changes. • Pension funds • Socially responsible investment funds • Hedge funds that take an active positions • Individual investors Institutional Shareholder Services (ISS) and Glass Lewis are the largest proxy advisory firms.
    16. 16. • Relatively new phenomenon in India. • Passive approach of investors (Retail, Domestic Institutional Investors, Foreign Institutional Investors ) to corporate decision making till recently. • Prohibitive legal costs. • Multiplicity of regulatory bodies. • Controlling shareholders. • Independent directors are generally elected by the promoters. State of Shareholder Engagement in India
    17. 17. Corporate Governance objectives in India • Key objective of corporate governance in India : To strike a balance between the rule of majority shareholders and the protection of the rights of minority shareholders. • Indian Corporate Governance Framework is in compliance with the Corporate Governance principles of Organization for Economic Co-operation and Development (OECD). • The new Companies Bill 2012 bill replaces the Companies Act of 1956. It bring in reforms to enhance corporate governance by shifting focus on the equitable treatment of all shareholders. • Securities and Exchange Board of India (SEBI) has introduced significant changes to the listing agreement aimed at protecting minority shareholder interests.
    18. 18. • Disclosures. • Shareholder Voting process. • Appointment of Independent Directors by minority shareholders. • Related Party Transactions. • Exit Scheme. • Class Action. • Stakeholder Relationship Committee, Nomination and Remuneration Committee. Key Regulatory features (India) for Investor Protection
    19. 19. Regulatory features in India – Disclosures • SEBI has mandated large listed companies to disclose summary results on a quarterly basis in the Annual Report. • Disclosures are required to be made to the Stock Exchange and to be posted on the company‟s website. • In India companies are mostly prompt in reporting quarterly earnings and dividends. but • Postal ballot forms sent to the shareholders for approval on proposed transactions often do not have sufficient details required to make informed judgment.
    20. 20. Regulatory features in India - Shareholder Voting • Companies Bill recognizes the voting rights of its members to vote on any resolutions in any meeting of the company or by means of postal ballot. • In 2001, „Passing of Resolutions by Postal Ballot‟ was introduced in the Companies Act, 1956. • In 2012, SEBI made it mandatory for top 500 entities listed on the National Stock Exchange (NSE) and Bombay Stock Exchange (BSE) to provide e- voting facility to its shareholders. • A SEBI directive requires Asset Management Companies of Mutual Funds to disclose their voting policies and their exercise of voting rights on their web- sites and in Annual Reports. Clause 110 of the Companies Bill : Passing of resolutions by postal ballot. Clause 108 of the Companies Bill : Voting through electronic means. Clause 114 of the Companies Bill : Requirements for ordinary and special resolutions.
    21. 21. Regulatory features in India - Independent Directors • The concept of independent directors was introduced in Clause 49 of the listing agreement issued by SEBI. • Companies Bill 2012 mandates all listed companies to appoint independent directors. The bill recommends creation of a data bank containing names, addresses and qualifications of persons who are eligible and willing to act as independent directors. • The Bill requires the appointment of independent director to be approved by the company in general meeting. • In a consultative paper on corporate governance norms, SEBI has put forth a proposal that companies be required to adopt cumulative voting as a method of electing independent directors. Clause 150 of the Companies Bill : Selection of independent directors. SCHEDULE IV : Code for Independent Directors
    22. 22. Regulatory features in India - Related Party Transactions • Clause 49 of the listing agreement issued by SEBI requires the company to disclose any materially significant related party transactions to the Audit Committee of the Board. • The Companies Bill includes provision for approval of Related Party Transactions, with transaction amounts exceeding prescribed limits or transactions which are not on conducted on market terms by the Board of Directors or by a special resolution in the general meeting. • The Companies Bill requires Independent directors to authorize every contract/ arrangement entered into with a related party, and provide a justification for it. • The Bill also requires that no member of the company shall vote on such resolutions to approve any contract or arrangement if such member is a related party. Clause 188 of the Companies Bill : Related Party Transactions
    23. 23. Regulatory features in India - Exit Scheme • Exit option is a measure to deal with investor disagreement over companies either demerging a profitable business or suddenly entering new areas by changing the objects for which the money was raised. • The shareholders dissenting from a scheme or contract shall be given an exit offer by the promoters or controlling shareholders at such exit price and in such manner and conditions as may be specified by the Securities and Exchange Board by making regulation in this behalf. • Majority shareholders (holding at least 90% of equity share capital) who have acquired majority stake through amalgamation, share exchange, conversions etc. are required to compulsorily notify their intention to buy out minority shareholders. Clause 235 of the Companies Bill : Power to acquire shares of shareholders dissenting from scheme or contract approved by majority. Clause 236 of the Companies Bill : Purchase of minority shareholding
    24. 24. Regulatory features in India - Class Action • A class action suit is a form of a lawsuit where a large group of people collectively can bring a claim to National Company Law Tribunal (NCLT) through a representative, to sue the management of a firm, its auditors or a section of shareholders in case of suspected wrongdoing. • The Companies Bill, 2012 provides for the establishment of fund called Investor Education & Protection Fund, a part of which shall be utilized for the reimbursement of legal expenses incurred in pursuing class action suits as may be sanctioned by the Tribunal. • The Companies Bill, 2012 mandates that expenses associated with the application of class action shall be defrayed by the company or any other person responsible for any oppressive act. Clause 245 of the Companies Bill : Class Action Clause 125 of the Companies Bill : Investor Education and Protection Fund
    25. 25. Stakeholder Relationship Committee • The Companies Bill requires the formation of Nomination and Remuneration Committee and Stakeholders Relationship Committee for every listed company. • The Bill recommends that companies, in which the combined membership of the shareholders, debenture holders, deposit holders and any other security holders is more than one thousand at any time during the financial year, are required to constitute a Stakeholders Relationship Committee. • The Stakeholders Relationship Committee shall consider and resolve the grievances of security holders of the company. • The Committee is required to be chaired by a Non-Executive director. Clause 178 of the Companies Bill : Nomination and Remuneration Committee, Stakeholder Relationship Committee
    26. 26. Nomination and Remuneration Committee • The Nomination and Remuneration Committee will be required to formulate the criteria for determining qualifications, attributes and remuneration for the directors and key managerial personnel. • The Nomination and Remuneration Committee will be required to identify persons who are qualified to become directors and who may be appointed in senior management, recommend their appointment and removal to the Board and carry out evaluation of every director‟s performance. • The Nomination and Remuneration Committee will be required to ensure that the level and composition of remuneration is reasonable and sufficient to attract, retain and motivate directors to run the company successfully. Clause 178 of the Companies Bill : Nomination and Remuneration Committee, Stakeholder Relationship Committee
    27. 27. Proxy advisory firms in India • The phenomenon of shareholder activism in India is picking up with the emergence of proxy advisory firms since 2010. • Currently there are three proxy advisory services in India. InGovern, Stakeholders Empowerment Services (SES) and Institutional Investors Advisory Services (IIAS). • These firms analyze corporate proposals placed for shareholder approval and give their recommendations regarding the proposals to institutional investors such as mutual funds, pension funds, insurance companies, commercial banks, hedge funds, foreign institutional investors.
    28. 28. Findings and Conclusion • Shareholder engagement in India has been largely subdued due to the shareholding pattern of Indian listed companies. • Controlling shareholders in India can yield influence over the management, but minority investors find it difficult to collaborate and exert influence on corporate decisions. • Regulators realize the need to improve board-shareholder engagement to allow investors to make informed investment decisions and in turn augment ability of companies to attract risk capital from domestic and foreign investors. • In line with the international best practices of corporate governance, following amendments have been introduced to the new Companies Bill that seek to enhance minority shareholder participation and empower the minority investors in India. • Class Action • Exit Schemes • Majority of minority voting for Related Party Transactions • Defining role of Independent directors • Similar to UK stewardship Code, SEBI requires mutual funds to play an active role in ensuring better corporate governance of listed investee companies.
    29. 29. Findings and Conclusion • Way forward for improving shareholder engagement: For Companies • Creation of effective shareholder engagement strategies and channels for board shareholder communications. • Proactive dialogue with large shareholders and addressing issues raised by proxy advisories • Adoption of stewardship mandate by other institutional investors such as pension funds, insurance companies and investment trusts For Regulatory authorities • Improving guidance for disclosures and for identifying Related Party Transactions • Considering cumulative voting for electing independent directors. • Creation of conducive legal environment for pursuing class action. • Deployment of some portion of funds available with regulatory authorities or Ministry of Corporate Affairs for litigation funding. • Speedy disposal of investor petitions presented to National Company Law Tribunal. • Selection and appointment of independent directors in a manner that promotes their independence in thought and deed.
    30. 30. PRESENTED BY : Ms. SOMALI CHAKRABARTI Sloan Fellow, Masters in Leadership and Strategy, London Business School Educator and Consultant with interests in Strategy, Corporate Governance and Finance Web : Blog : Email :