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Business News/ Opinion / The winter of our shareholder discontent
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The winter of our shareholder discontent

More needs to be done to strengthen company boards

Illustration: Shyamal Banerjee/MintPremium
Illustration: Shyamal Banerjee/Mint

A firm that advises institutional shareholders has asked its clients to vote against a resolution to appoint Vijay Mallya as chairman of United Spirits for yet another term. Mallya has been facing rough weather. His bankers have already moved to declare him a wilful defaulter. Institutional Investors Advisory Services has said in its note that United Spirits will find it difficult to raise money from the Indian financial system if its chairman is categorized as a wilful defaulter. Regulators have been pushing lenders to get tough with loan defaulters. Shareholders are due to vote in the annual general meeting later this month.

Another test case is due soon. Shareholders of Maruti Suzuki India Ltd will have to vote on the controversial proposal by the company that its new manufacturing facility will be built by Japanese parent Suzuki Motor Corp. rather than the local company. The plan was put on hold after a rare shareholder revolt earlier this year. Investors in Maruti were not convinced of the management argument that such a move would help their company conserve cash. The angry shareholders said that the proposal was a ploy to shift revenues from the listed company to the offshore parent.

Institutional shareholders in India have usually been passive. A look at the voting record of mutual funds shows that they have largely abstained from voting on corporate proposals even though there has been indirect regulatory pressure for them to get more active in the companies they invest in. Most other large institutional shareholders have preferred not to take on company managements, perhaps because of the political pressure from New Delhi. It is worth asking why there were so few questions asked when company managements rushed to borrow for questionable projects that now burden Indian banks with a heavy load to bad loans.

It is against this backdrop that some recent cases become important. What happened at Maruti is just one example. There was a shareholder revolt at Tata Motors Ltd in July over executive compensation. And then there was the sharp criticism by the foreign Children’s Investment Fund because the government was deciding on coal prices in a manner that it said was hurting the interests of minority shareholders.

Corporate boards are the first line of defence against decisions that harm investors. India has done a fair bit in the recent years to strengthen corporate boards, but the actual response in board rooms has overall been disappointing. The silence of company boards during some of the more contentious corporate episodes in recent years—from the Ambani family dispute to the telecom scandal—is telling. Many of the best Indian companies have independent directors who have been there for so long, sometimes as long as two decades, so that their independence could be compromised. Some professionals sit on so many boards that it is hard to see how they do justice to their positions.

It is for this reason that more vigilant institutional shareholders are needed. They have the right incentives to protect their money. The Maruti and United Spirits shareholder meetings should be closely watched because they could tell us a bit about whether there is really a new corporate governance culture emerging in India.

Not all the problems companies face right now are because of bad managements. A cyclical downturn does hurt financials. Some of the current crop of problems can also be explained by the administrative mess created by the Manmohan Singh regime in its last three years. But there are also ample examples of risky behaviour as well as outright corporate malfeasance, some of which has filtered into public discussions on crony capitalism. It is this third category of problems that requires to be checked by alert investors. Institutional investors need to take the lead here.

Are institutional investors lax on matters of corporate governance of the firms they invest in? Tell us at views@livemint.com

Follow Mint Opinion on Twitter at https://twitter.com/Mint_Opinion

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Published: 21 Sep 2014, 06:03 PM IST
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