Corporate Governance Practices
Current and Future
April 18, 2016
Shriram SubramanianINGOVERN RESEARCH SERVICES PVT. LTD.
News – Fact or Fiction?
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TCI files a law suit against Coal India and its Directors
Narayana Murthy joins Infosys Board as Executive Chairman – June 2013. He
becomes Chairman Emeritus – June 2014
Amnesty slams Vedanta -exposes gross human rights violations
by company in Orissa, India
WSJ: Shareholder Activism Meets BollywoodEros International has become a target for
London’s Knight Assets
Tata Motors shareholders reject proposals for Waiver of Excess
Remuneration
Spotlight on CG Topics since 2010
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Director Attendance
Multi Boarding
Tenure of IDs
Auditor & Partner Tenure
Auditor Compensation
Compensation
Stock Based Compensation
Single Resolution for Appointment of 2 Directors
Single Resolution for Compensation of Directors
Disclosures
Related Party Transactions
Royalty Payments
M&A Valuations
2011 AGMs – Investor Engagement
Resolutions put to vote by show of hand and passed unanimously
46 companies didn’t submit “Outcome of AGM” to exchange
Even when Outcome was submitted, “Minutes or Proceedings of AGM” is not given
For 31 companies, Chairman of Board not present at the AGM
For many companies, Audit Committee Chair not present at the AGM
In most AGMs, shareholders didn’t ask queries on any resolution
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Key Developments for Investors
Domestic mutual funds report how they vote from FY2010-11
Public holding in listed companies > 25%
Regulations by MCA and SEBI
Increasing activism by institutional investors
Voting Infra - eVoting
Proxy Advisory Firm – InGovern – making Vote Recommendations
Companies report voting patterns at shareholder meetings
Case Study: Tata Motors
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June 2014: Proposals for waiver of excess remuneration to
Two Executive Directors and former Managing Director
Proposals rejected by shareholders
Reaches out to shareholders and proxy advisory firms
January 2015: Re-tables the resolutions with detailed
explanation
Routine Proposals not passed by shareholders
CG in India: Current State
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Explanations to proposals are now Detailed & Informative
Companies reach out to investors for passing proposals
Companies engage with proxy advisors to understand investors’ concerns
Companies hire consulting firms to diagnose their existing corporate governance practices and enhance CG edifice
Companies avoid contentious proposals
Investors are more active in voting
Investors are proactively voicing concerns
Traits Across 4 Categories of Companies
Government-owned companies
Promoter-dominated companies
Listed subsidiaries of MNCs
CEO-led widely-held companies
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InGovern Report on India Proxy Season 2015
CG in India: Current State
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InGovern Report on India Proxy Season 2015
Proxy Season 2015 – Contentious Resolutions
Sl Company Name Resolution(s)
1 Siemens LtdSale of Metals Technologies Business to Promoter
Entity
2 United Spirits Ltd 6 Resolutions for Related Party Transactions
3 IVRCL Limited Conversion of Debt of CDR Lenders into Equity Shares
4 Yes Bank LtdAppointment of an Independent Director due to
attendance concerns
5 JSW Holdings Ltd 4 resolutions for Related Party Transactions
6Apollo Hospitals
Enterprises Ltd
3 resolutions for re-appointment of Exec. Vice
Chairman, MD and Joint MD for sketchy disclosures
7 Adani Ports & SEZRe-appointment of a Director who retires by rotation,
intercorporate investments, related party transactions
Case Study: Maruti Suzuki
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SMC
MSIL100% Sub of SMC
100% 56.2%
Sale of Vehicles
Lease of land &providing assistance
Case Study: Maruti Suzuki
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January 2014: Maruti announces its proposal to let Suzuki setup manufacturing plant at Gujarat and sell the cars to Maruti
March 2014: The Company changes certain terms of the agreement to make it more beneficial to Maruti
April 2014: The Companies Act 2013 requires shareholder approval through Special Resolution with promoters abstaining
Apr 2014 – Dec 2015: Company appoints IB – Axis Capital – for road shows and meets investors and proxy advisory firms
May 2015: The Companies Act amended – RPTs voting changed from Special to Ordinary
Dec 2015: Maruti tabled the proposal with new terms
Case Study: Vedanta–Cairn Merger
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June 2015: Vedanta and Cairn India announce plans for merger
Swap ratio: 1 equity share & 1 pref. share of Vedanta for 1 equity
share of Cairn India
Proxy advisory firms and Shareholders voice concerns for Cairn India
shareholders over swap-ratio, socializing of debt of Vedanta, human-
rights issues, tax liabilities, etc.
Both companies reach out to proxy advisory firms and shareholders
LIC and Cairn UK - key non-promoter shareholders of Cairn India
Likely - change in terms of merger??
Case Study: Infosys
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March 2016: Infosys tables proposals:
stock incentive schemes appointment of IDs extension and compensation of its MD
Company engages with proxy advisory firms
Some proxy advisory firms recommend voting against stock
incentive schemes and appointment of ID
Company puts out explanation - rationale behind the proposals;
disagreeing with proxy advisory firms
Voting Analysis
some investors vote against some proposals only 23% of Promoters vote FOR extension and compensation of
MD and appointment of ID
International Trends
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concerns over the variable pay of chief executive Stuart
Gulliver, which exceeded 200% of his salary.
his benefits package – worth 50% of salary – “excessive
and inappropriate”
60% of shareholders reject Bob Dudley’s £14m package
”surge in shareholder activist campaigns directed at corporate America”
Fallen well short of the environmental commitments it made at last year’s meeting
Future: Boards and Shareholders
Board Meetings
Committee Meetings
Financial Reporting
Non-Financial Reporting
Disclosures
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Why reach out to shareholders?
Why meet? Why vote?
CG Evolving: Pay Ratio Disclosure
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Companies Act on Pay-ratio Disclosures
Disclose Director & KMP compensation
Disclose the ratio between Director Compensation to Median Employee
Remuneration
Disclose increase in Compensation vis-à-vis Financial Performance and logic
InGovern Report on Pay-ratio Disclosures: Nov 2015
Key findings of the report:
Avg Compensation of Nifty EDs: Rs. 9 Cr
Median Employees Rem: Rs. 5 L
Avg Ratio of Dir-to-Employees: 170
70% highest paid EDs are Promoters
Institutional Shareholders
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Future: Shareholder Activism
Engage with companies
Voice Opinion / Public Outrage
Demand Change in directors, management, capitalization, ownership structure, operations
Get Board Seats
Get Shareholder Proposals passed
File Court Case
File Class Action Suit
Takeover Company
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CG Topics – Spotlight in Future
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Compensation
Board Diversity
Board Evaluation
Capital Allocation
Shareholder Proposals
Activist Shareholders
Climate Change
Water Management
Social Rights
Hindering Activism
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Hostile Takeovers
Benign Lenders
Legal Hassles
Regulatory Enforcement
Case Study: Coal India Limited
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• The Children’s Investment Fund of UK (TCI) dragged Coal India (CIL) & its Directors to Court over its functioning & disparity in coal-pricing wrt international & private players.
• At that time, TCI held ~1.5% of CIL & was its biggest institutional investor.
TCI was unsuccessful in suing CIL & finally began offloading its shares
TCI also expressed reservation in investing in India again
Activism – Coal 4 India
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David vs Goliath?
Why should Coal India care?
Why should Govt. of India care?
Why should investors care?
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Case Study: Norway’s GPFG
Norway's Government Pension Fund Global excludes 52 coal companies
– not to invest in CESC, Coal India, NTPC, Reliance Power, Reliance Infrastructure, Tata Power
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Case Study – LIC’s stake in ITC
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ITC: ~60% of revenue and ~80% of profits from cigarettes.
LIC is the 2nd biggest shareholder of ITC with 13.12% stake.
LIC stake is worth ~Rs. 33K Cr.
LIC also has stake in other cigarette manufacturers - VST
Many NGOs have protested against LIC’s investment decision
Govt spends >Rs. 10K Cr. for treatment of tobacco-related diseases
Logo – Protecting ‘Life’ or Destroying ‘Life’?
Should LIC continue to invest in ITC?
Enhancing Corporate Governance Edifice
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Ensure honesty
Prevent profiteering
Eliminate conflicts of interest
Regulate related party transactions
Disclose - bad news
Allocate capital efficiently
Engage with all stakeholders
Build TRUST
Corporate Governance PracticesCurrent and Future
Shriram SubramanianINGOVERN RESEARCH SERVICES PVT. LTD.
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