Rise of proxy advisors

On January 1, 2022, a game-changing regulation impacting the appointment/reappointment of independent directors in listed companies will become applicable.

The SEBI regulation mandating the requirement of passing a special resolution necessitating 75 per cent of the votes polled comes into effect from that day. This was probably a mid-point arrived at by SEBI after receiving responses to its discussion paper of March 2021 containing a proposal to appoint independent directors through dual voting, whereby two sets of voting was sought to be proposed from shareholders — one without the votes of promoters and the other inclusive of their votes.

Recent events in the passing of resolutions, both ordinary and special, lead to certain pointers — the maturing of the corporate governance ecosystem through regulatory nudge by making e-voting compulsory, mandating institutional shareholders to vote and record and the coming of age of proxy advisors.

Though few in numbers, proxy advisors’ presence and ability to influence decisions made by minority shareholders, more particularly institutional shareholders has been enormous, considering the impact their reports have caused in the decision-making process.

A close look at the evolution of the governance ecosystem, which upholds corporate democracy, deserves merit and attention. E-voting introduced through an amendment in the Companies Act, 2013 was the initial salvo in a significant turnaround which facilitates faceless voting by shareholders.

Institutional shareholders such as mutual funds, alternate investment funds and the like have increased their holdings in listed companies over a period thus making their collective voices getting heard through their voting preferences, especially in proposals which were contentious.

Stewardship codes introduced by regulators seemed to have further altered the rules of the game. Not only were institutional shareholders mandated to vote on resolutions of investee companies, they were also directed to record their rationale in voting preferences and make them public.

The emergence and growth of proxy advisors in the recent past could thus be linked to the regulatory push in the corporate governance framework. These firms, through their recommendations to the institutional shareholders, have a significant influence on the decision-making process on resolutions as has been evidenced by voting results in the recent past.

Instances of marquee independent directors getting reappointed at the corporate hustings with help from promoters and non-institutional shareholders, companies reconfiguring remuneration packages for the MD and CEO have indeed caught the discerning eye of the observer. Also, the proxy advisor showing the mirror on a former government auditor looking to retain his board position through a convoluted route has raised eyebrows.

While it is nobody’s case to state that all their voting recommendations are accepted and acted upon, yet their role and contribution in the emergence and orderly development of a self-correcting mechanism cannot be overlooked. It appears that proxy advisors care for absolute and not merely adequate compliance.

The SEBI regulation mandating special resolution requiring three-fourths of the votes polled for appointment/reappointment of independent directors is expected to make things much more onerous for listed companies. Proxy advisors would strive to make their reports on independent directors wholesome, incisive and objective.

Whether one likes them or not, proxy advisors have become important in in the boardroom. With the growing number of listed firms and more companies with no identifiable promoters seeking listing of their shares, the proxy advisors’ role is cut out for the long haul.

The writer is a Practising Company Secretary and former President-ICSI

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