A. Background

Proxy advisors often issue voting recommendations in relation to appointment of directors of listed entities, including for appointment of promoter directors and independent directors. The recommendations of proxy advisors may influence the decision making of public shareholders, particularly institutional investors, who are not involved in the management of listed companies. This article sets out a brief summary of the regulatory framework for proxy advisors in India and the recent instances of voting recommendations of proxy advisors in the context of appointment of directors.

B. Regulatory framework on proxy advisors

Securities and Exchange Board of India (“SEBI”) regulations define a ‘proxy advisor’ as ‘any person who provide(s) advice, through any means, to institutional investor or shareholder of a company, in relation to exercise of their rights in the company including recommendations on public offer or voting recommendation on agenda items’.^[1]

Proxy advisory firms (except foreign proxy advisors) are required to obtain SEBI’s registration and comply with inter alia the conflict of interest norms, disclosure requirements and code of conduct prescribed by SEBI.

SEBI’s Procedural Guidelines for Proxy Advisors dated August 3, 2020 (“Guidelines”) additionally require proxy advisors to inter alia: (i) formulate voting recommendation policies which must be reviewed at least once annually; (ii) clearly disclose in their recommendations the legal requirement vis-a-vis the higher standard they are suggesting (if any), and the rationale behind the recommendation of higher standards; and (iii) share their report with its clients and the company at the same time.

The Guidelines also allow the listed entity to issue comments / clarifications to the reports issued by proxy advisors, based on which the proxy advisors may either revise their recommendation or issue their remarks, as an addendum to the report.

C. Recent Guidance on Director Appointments

Set out below are some of the reasons for proxy advisors recommending a vote against the proposed appointment of independent / nominee directors of listed entities recently:

• Lack of experience: Proxy advisory firms have recommended against appointment of promoter nominee directors of several listed entities, due to limited experience (largely due to young age) of the proposed nominees. As per some proxy advisors’ guidelines, individuals must have an established track record and work experience of at least 10 (ten) years before being appointed as director on the boards of listed companies;
• Cool-off Period: Proxy advisory firms recommended against appointment of a former independent director as Group CEO before completing a cool-off period of 1 (one) year from his previous tenure as an independent director. As per the proxy advisor firm, while the proposal was technically in compliance with the applicable law, the back-to-back resignation of the independent director and appointment of the Group CEO went against the spirit of law;
• Remuneration: Proxy advisory firms have previously recommended against appointment of MD / CEO of listed entities, due to excessive remuneration despite a decline in the company’s profit;
• Multiple directorships and full-time positions: Proxy advisory firms have recommended against appointment of nominee directors of listed entities, due to multiple directorships of the nominee in other entities (such as serving on the board of directors of 9 companies and in a separate instance, on the boards of 7 listed entities), even though directors are permitted to hold up to 20 directorships (and up to 7 directorships in listed entities under law), and excessive full-time positions (such as the same individual already holding the position of managing director in one company and executive director in another company);
• Concerns regarding independence of independent directors: Recommendation against appointment of independent directors of listed entities on various grounds, such as conflict of interest due to business relationship with the listed entity or its promoters (for instance, the proposed nominee being a partner in advisory firms engaged by the listed entity or the proposed nominee being the chairman of an entity with which the listed entity has commercial arrangements), the proposed director having been a director of another group company for more than 10 years, lack of time / capability of the proposed nominee to act as an independent director due to a pre-existing  role of the proposed nominee as a key managerial personnel of another listed entity which is facing regulatory hurdles.

In several cases, the appointment of the proposed nominee directors has been rejected by the public shareholders (particularly foreign investors) based on the guidance of the proxy advisors. While the shareholders may approve the appointment of the directors irrespective of the proxy advisors’ recommendation, such appointments could be prone to further scrutiny from the media and could also lead to regulatory review.

The recommendations of proxy advisory firms are also not always consistent (vis-a-vis their own past recommendations as well as recommendations of other proxy advisors on the same subject matter), which may result in lack of an objective criteria for appointment.

D. Conclusion

With the increased relevance of proxy advisor firms in influencing the manner in which public shareholders vote on resolutions for appointment of directors, listed entities may consider meaningful engagement with proxy advisor firms, including assessing their guidelines for voting recommendations (which are published annually), to reduce the risk of adverse recommendations from proxy advisory firms or concerns from public shareholders.

This is particularly relevant in the context of the recent amendments to the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, which require shareholders’ approval for appointment / re-appointment of directors at least once in every five years, with effect from April 1, 2024.^[2]

Footnotes:

[1] Regulation 2(1)(p), Securities and Exchange Board of India (Research Analyst) Regulations, 2014.

[2] Regulation 17(1D), Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015.