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All you wanted to know about proxy advisory services

| Updated on January 15, 2018

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Proxy advisory services have been much in demand for quotable quotes in the ongoing tussle between the Ratan Tata and Cyrus Mistry factions at the Tata Group. The term probably takes you to your college days when experienced seniors eagerly imparted their ‘proxy advisory services’ to newbie students. But in the corporate world, proxy advisory services have a very weighty role to perform.

What is it?

Proxy advisory firms are independent research outfits that 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. 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.

India has home-grown proxy advisory firms such as Institutional Investor Advisory Services (IiAS), InGovern and Stakeholder Empowerment Services (SES) that provide these services.

Why are they important?

Well, in an ideal world, there would be no place for them. Shareholders would be interested in the proper running of their companies and hold the management and the board accountable for their actions. They would attend all AGMs and EGMs religiously, eschew gifts and sweet boxes, and vote only with their consciences, for the long-term benefit of their companies. They would read all notices and resolutions carefully and not treat them as junk mail.

But we know the reality is different. Shareholders, generally, are uninterested in voting and care a lot about dividends, bonuses, free coupons and gifts at the AGMs. Yes, institutional investors such as mutual funds and insurers often represent retail investors as proxies in company meetings.

But as with these firms also juggling hundreds of stocks at a time, they don’t have the bandwidth to dig deep into every corporate event.

So you need someone both independent and knowledgeable to weigh the advisability of a particular step being taken by the company, whether it is okay to let the bright young scion take over daddy’s mantle as MD, or if the professional CEO deserves a 30 per cent pay hike because all his peers in the industry have received one. Proxy advisory firms weigh such matters and offer an independent view. As long as they avoid charges of conflict of interest, they serve investors quite well.

Why should I care?

As a retail investor, you may not attend all the AGMs and EGMs of the companies you own. But if you are conscientious, you can opt for e-voting on big corporate actions. The views that proxy advisory firms put out can be a big help.

Proxy advisories also do a good job of policing the boards and governance records of the firms they track, and nudging institutional investors to take a stand on governance issues.

The stand taken by proxy advisory firms in the Cyrus-Ratan face-off or in the Max promoters awarding themselves a non-compete fee in the merger deal with HDFC Standard Life and bringing to light numerous other corporate shenanigans are useful and of interest to all stakeholders.

The bottomline

With help at hand, shareholders must move towards becoming ‘active’, if not activist. Words such as ‘corporate governance’ will then not be treated as cynically as they are now.

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Published on November 28, 2016

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