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  • A dummy’s guide to Proxy Advisory Firms

    Publish Date: 9th August, 2018

    Deepak Parekh is the chairman of India’s leading housing finance company: Housing Development Finance Corporation (HDFC). He is considered an icon by many in the corporate circles after having led the company for nearly three decades. Yet, around 23% of investors voted against his re-appointment as a director on the HDFC board. How did this happen?

    It had something to do with Institutional Shareholder Services (ISS) and Glass Lewis: two global proxy advisory firms.

    Also read: HDFC bank Q1 result: Key highlights

    What are proxy advisory firms?

    Proxy advisory firms are independent research firms that provide advisory services to investors. They analyse important corporate issues such as:

    a) mergers and acquisitions

    b) important leadership appointments

    c) CEO pay

    d) Shareholders who should vote in Annual General Meetings (AGMs), Extraordinary General Meetings (EGMs) and court convened meetings.

    What are their functions?

    Proxy advisory firms put out detailed reports that advise shareholders on how they can safeguard their interests. They also provide independent voting recommendations. In return, they charge fees from institutional investors for their services.

    As an investor, there can be many questions for which you may not have an answer. For example, should the CEO get a pay hike of 25% this year, or is it a good decision for the company to merge with its competitor? A proxy advisory firm does all the legwork and evaluates the pros and cons of such important corporate matters.

    Why are they important?

    Ideally, if shareholders attended all AGMs, EGMs and cast their votes based on their long-term financial beliefs, proxy advisory firms would not be necessary. However, things are different in the real world. Not all shareholders are interested in voting and many don’t have the time to attend every corporate event.

    Also read: 5 interesting takeaways from Reliance AGM

    As a result, it has become necessary for the creation of independent, knowledgeable entities that have the time and resources to analyse and offer advice to investors on the different steps taken by a company. This is where proxy advisory firms step in.

    What are some of the home grown proxy advisory firms in India?

    Institutional Investor Advisory Services (IiAS), InGovern and Stakeholder Empowerment Services (SES) are some of the major firms that provide these services in India. These firms are regulated by the Securities and Exchange Board of India (SEBI).

    Is there any conflict of interest?

    There could be a potential conflict of interest. In the current day, proxy advisory firms have a great responsibility because a lot of investors make voting decisions based on the reports released by these firms. As a result, they are supposed to provide independent and fair analysis. This means any inaccuracies in their report could adversely impact the outcome of a vote.

    Conclusion

    Proxy advisors have a hefty role in the financial world. With global proxy firms, ISS and Glass Lewis having a big impact on the special resolution vote of HDFC bank, many people have called for a domestic regulation of global proxy advisory firms.

    Also read


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