Role and Influence of Proxy Advisory Firms in India

Source-This post on Role and Influence of Proxy Advisory Firms in India has been created based on the article “Don’t fear the critic: How proxy advisors improve shareholder decisions in India” published in “The Indian Express” on 6 June 2024.

UPSC Syllabus-GS Paper-3– Indian Economy and issues relating to Planning, Mobilization of Resources, Growth, Development and Employment.

Context-The article highlights the issues associated with proxy advisors. Recently, Proxy advisors have drawn attention to their recommendations that led to the rejection of resolutions, like Nestle’s royalty payout or the demerger of ITC Hotels.

CEO of JP Morgan Chase has recently flagged concerns about the undue influence of proxy advisors.However,this is not true in case of India. Institutional investors in India tend to conduct their own analysis, with PAs serving as a support system rather than exercising too much power.

What is the role of proxy advisors?

1) They serve as a support system for investors to make informed decisions.

2) They offer criticism and point out flaws, much like doctors diagnosing illnesses, which encourages corrective measures for good governance.

3) They support management’s decisions/actions if they are fair and adhere to governance parameters.

What are some limitations of proxy advisors?

1) They have neither the expertise, vision, nor the information that the board has to determine what’s best for the company.

2) They are not required to have the abilities to outsmart the boards of the numerous companies they track.

3) It’s crucial to draft meeting notices properly, including detailed explanations and disclosures, to prevent PAs from making negative recommendations.

4) They sometimes differ in their interpretation of laws from companies, creating a conflict between regulatory compliance and governance.

5) Proxy advisors sometimes don’t only trust valuer reports; they also do their own valuations. But problems occur when companies disagree with their assessments, especially in cases like Tata Motors and ICICI Securities, where some minority investors object to proposals because of their expectations by not providing solid arguments.

What should be the way forward?

The proxy advisor industry has indeed matured over its decade-long existence. However, there is a need to maintain independence, free it from conflicts of interest, and focus on its role in supporting informed decision-making without being concerned about the outcomes.

Question for practice

What is the role of proxy advisors? What are some limitations of proxy advisors?