Shareholder Activism Keeps Cos In Check – Times of India – 17-Nov-2014
November 18, 2014 - Uncategorized
Shareholders, who were till now either pushed around or completely ignored, are increasingly making their voices heard. This year the proxy season was intense, with greater participation by both retail and institutional shareholders. Empowered by changing regulations, investors these days ask the right questions from managements, and voice opinions by casting their votes.
The number of votes on shareholder resolutions has increased over the years, as is evident from a study by shareholder proxy firm IiAS. The study shows that in the 2014 proxy season, domestic mutual funds voted (either for or against) on 61% of the 30,124 resolutions presented to shareholders. This was over 2x the votes cast in the 2011 proxy season (during which mutual funds voted on only 54% of the 16,043 shareholder resolutions).
Increased engagement between shareholders and company managements has led to greater awareness and put the spotlight on corporate governance and responsible activism, with many companies compelled to withdraw decisions which were opposed.
The resolutions were taken up on a gamut of proposals: board appointments and compensation, including ESOPs; related-party transactions; sale of business, royalty payments; delisting and routing transactions through subsidiaries. Among the contentious cases was that of Maruti Suzuki, which was compelled to change the terms of its agreement with Suzuki Motor Company(Japan) on setting up its Gujarat plant following strong opposition from institutional investors. Around 23% of Havells India’s shareholders that voted cast their vote against the payment of royalty to promoter-owned companies for the use of the brand ‘Havells’. The resolution came very close to being defeated.
“The initial success in defeating resolutions has energized the average voter. Companies need to take these investors seriously. The increased participation is an evidence of the hope of retail and institutional investors that they have a say. Companies would be wise to listen to this murmur before it reaches a deafening crescendo,” an IiAS official said.
A change in regulatory guidelines has spurred shareholders and mutual funds into action. To prompt resolute voting decisions, in 2014, Sebi asked mutual funds to publish the rationale for their voting decision, and shortened the reporting period – mutual funds were told to disclose their voting decisions on a quarterly basis (down from once a year earlier). In 2011, Sebi had asked mutual funds to disclose how they voted on shareholder resolutions. “In making this change, the capital markets regulator effectively used disclosure as an enforcement tool: public dissemination of information creates an obvious comparability, thereby fostering an environment of competitive behaviour that serves shareholders, and a corporate governance agenda,” IiAS says.
Also, e-voting has changed the number game. The regulator has mandated that all listed companies must enable e-voting on all resolutions through the depositories.
Earlier, in shareholder meetings, votes were counted by show of hands. While, e-voting has not materially increased turnout as yet, its real implication of e-voting is in the manner in which the votes are counted. More importantly, the implementation of e-voting means all resolutions, even those which are presented at shareholder meetings (not via postal ballot), have to be polled.
Sebi guidelines, and in some instances the Companies Act 2013, do not allow promoters or controlling shareholders to vote on transactions in which they have an interest. The regulations imply that power of public shareholders’ vote in such transactions is now significantly higher than the actual shareholding. For example, if the promoters own 75% shares in a listed company, and the public the balance, this 25% will account for 100% of the voting power for related-party transactions. This gives one share a voting power of 4x. IiAS describes this exponential power of a single share as the ‘voting multiplier.’ This multiplier means public shareholders can now impact the outcome by vetoing transactions that they believe are unfair, it adds.