HINDALCO AGM – REFLECTION OF TIMES TO COME

What happened at the Hindalco AGM on September 21^st has come to light only now, thanks to the  scrutinizer’s report which was published on the BSE on 12^th Oct.

The fact that Kumar Mangalam Birla (KM Birla) is the face and head of Hindalco and all the companies in his fold is a given; no one ever even thinks of refuting that. But 18.63% of institutional investors did just that – they voted against the reappointment of KM Birla as Chairman.

They voiced dissent on two counts against Birla - insufficient independence of the company’s remuneration committee and that Birla served on too many boards. Birla currently heads 8 other companies in his fold.

Sure enough KM Birla did not break into any sweat as an overwhelming 91.6% of the total votes polled in his favour; the required number is only 50% and he was way ahead of that. But what is worrisome is that there are now voices of dissent, that too in places where ‘voting in favor’ was never even a contest.

This is very similar to what happened to Deepak Parekh when in July, 22.64% of HDFC shareholders had voted against the reappointment and once again the reason was the same – served on too many boards. He just about managed to scrape though for a reappointment by skimping to the required 75% mark. Parekh has crossed 75 years of age and his reappointment came under ‘special resolution’ and required 75% ‘aye’ votes.

Both the proxy firms also recommended voting against two other HDFC directors, Bimal Jalan and Bansi Mehta as both exceeded the age limit of 75 years. Both of them resigned before the HDFC shareholders’ meeting.

In August’18, Glass Lewis recommended to the shareholders of ICICI Securities to against the proposal to elect ICICI Bank MD and CEO, Chanda Kochchar as a director of the company, citing the legal and regulatory issues facing her.

In all these recent cases of dissent, two names run as a common thread - Glass Lewis and Institutional Shareholder Services (ISS) Governance. So who are these two?  They provide proxy advisory services - institutional investors sometimes hold hundreds or thousands of different stocks at a point in time, they tend to need assistance in voting their shares come annual meeting time – that’s where ISS and Glass Lewis come in.  Both use various algorithms to determine whether a given company is deserving of a “yes” vote on Say on Pay, and whether individual board members should be supported. Many institutions follow their recommendations, while others subscribe to the services yet also employ their own staff to determine how they should vote their shares.

It was Uday Kotak, who led a SEBI-appointed panel on corporate governance who mooted this new law wherein a regular reappointment of appointment of a director needs more than 50% votes. But if the director is over the age limit of 75, a special resolution needs to be passed and requires 75% votes in favour. This law comes into effect from April 2019.

In that context, many veterans, some 30 of revered leaders of India Inc will be on thin ice. AM Naik, HK Khorakiwala, GVK Reddy, JJ Irani, YK Hamied, Adi Godrej, BK Birla, AB Ram, O Suzuki and many more. 42%  or 206 of India’s top 500 companies are yet to seek shareholder approval for 290 directors to continue in their board seats.

Uday Kotak has voiced his opinion that these foreign proxy firm need to be regulated. But if we are living in a free world, this would not be a right move. They are merely advising; what institutional investor do or do not do, is completely their prerogative. The issues raised by the proxy firms are neither incorrect nor unfair. Such kind of a fair, unbiased advice from the outside is required. Funds invest in companies which are strong and have a sound management in place. It is completely wrong to say that we should regulate the kind of advice they get.

The truth today is that activism is only going to grow. Irrespective of whether we love or hate them, activists perform a valuable function of bringing new thinking to corporate strategy and acting as the voice of the shareholder in the boardroom. More power to them!