4 July-2014, R Jagannathan/Firstbiz: The rise of proxy advisory firms for minority shareholders is a healthy development for improving the Indian public’s faith in listed companies. In particular, they have been successful in galvanising the bigger institutional investors – mutual funds, banks and financial institutions – to start acting in their own interest, and, in the process, helping smaller investors.
The most recent case is that of Tata Motors (TaMo), where minority shareholders – advised by shareholder advisory firm Stakeholders Empowerment Services (SES) – shot down a management proposal to let three directors, Ravindra Pisharody, Satish Borwankar and the legal heir of former managing director Karl Slym, who jumped to his death in a Bangkok hotel last year, keep the excess payments made to them. The amounts disallowed by the negative vote were Rs 3.15 crore for Pisharody, Rs 2.4 crore for Borwankar and Rs 14.6 crore for Slym’s heirs. They will have to pay the money back to the company, unless the company finds other ways to reward them.
Under the new companies law, when companies make low or inadequate profits, they need a 75 percent vote from shareholders (the actual vote in the TaMo case was 70 percent in favour, 30 percent against) if payouts to directors exceed five percent of profits. The amounts to be recovered relate to financial year 2013-14, when Tata Motors’ local unit performed poorly. However, the Tata Motors group as a whole made massive profits of Rs 18,869 crore – thanks to the phenomenal performance of Jaguar Land Rover (JLR). It is the local unit of Tata Motors that has been doing badly, with cars selling poorly, and commercial vehicles impacted by the economic slowdown.
The issue clearly is not the company’s ability to pay, but the flexing of institutional shareholder muscle.
The message from this poke in the eye is this: India Inc can no longer take minority shareholders – and especially institutional investors – for granted. New proxy advisory firms such as SES, InGovern, Institutional Investor Advisory Services and Institutional Shareholder Services Inc, among others, are actively advising their institutional clients on shareholder resolutions that may not be in their interest. Management resolutions will not sail through without questioning.
What these proxy advisory firms have done is stiffened the spines of the major investors – which is what cost Tata Motors the setback on directors’ pay. According to Mint, two-thirds of the institutional shareholders voted against the management proposal, while only 30 percent of the smaller shareholders did so. The key to minority shareholder power clearly lies with the institutional investors.
A few months ago, Suzuki’s proposal to set up a plant in Gujarat through a 100-percent subsidiary saw institutional investors voting with their feet, forcing the management to change its stance (read here). As Maruti shares crashed, the management had to listen.
Foreign investors have been at the forefront of other minority shareholder revolts in recent times, with Satyam Computer Services being exhibit A. In December 2008, institutional shareholders forced promoters to abort a merger of the IT services firm with Maytas, a real estate and infrastructure firm owned by the family of B Ramalinga Raju. The cancellation of the deal forced Raju to realise that his game was up and he had to confess in January 2009 that the real problem was accounting fraud in Satyam.
After the fraud was exposed, the company was sold to the Mahindras, who again promptly settled with gypped shareholders abroad – both in the US and UK. But Indian institutional investors – especially mutual funds – were less than eager to sue the company.
Two years ago, one foreign institutional investor – the Children’s Investment Fund – even decided to take on the government-owned Coal India Ltd for succumbing to pressure over coal pricing. The investor has a long, hard grind ahead, given the famed speed with which our court system works. But it has made its point: even a shareholder with one percent can embarrass the overwhelming shareholder.
The key takeaway from Tata Motors, Satyam, Maruti Suzuki and other minority shareholder actions against management initiatives is this: minority shareholders basically means big institutional shareholders, not the retail investor. The latter is asleep, and out for the count.
This offers us a clear clue on how shareholder democracy can really work: we must not emphasise direct retail ownership of shares, but indirect ownership through mutual funds and pension schemes.
Shareholder activism in America owes a lot to the fact that most of the institutional money is really the savings of its workers, whose pension funds are the biggest investors in listed companies. India’s focus on trying to protect small investors is pointless. The idea should be to give them collective voice through institutional holdings that are advised by proxy advisory firms.