Financial advisors are professionals who help individuals and institutions make sound financial decisions. They can provide advice on a wide range of topics, including investment planning, retirement planning, tax planning, and insurance.
Proxy advisors are firms that provide research and recommendations to institutional investors on how to vote their proxies.
What are Proxy Advisors?
Proxy advisors are firms that provide research and recommendations to institutional investors on how to vote their shares on corporate governance issues.
Proxy advisors typically charge institutional investors a fee for their services. In exchange, they provide investors with detailed research reports on individual companies, as well as recommendations on how to vote on specific shareholder proposals. Proxy advisors also offer a variety of other services, such as voting policy development and proxy voting execution.
Proxy advisors have been criticized for their lack of transparency and for their potential to create groupthink among institutional investors. However, they also play an important role in ensuring that corporate boards are accountable to their shareholders.
Proxy Advisors in India
India has a growing number of proxy advisory firms, which play a crucial role in advising shareholders on corporate governance issues and voting resolutions. These firms, such as IiAS, Stakeholders Empowerment Services (SES), and InGovern, are regulated by the Securities and Exchange Board of India (Sebi).
What is the need for Proxy Advisors?
Proxy advisory firms provide valuable insights to shareholders, who may not always have the time or expertise to analyse the complexities of corporate governance issues. By closely scrutinizing listed companies and their proposed resolutions, these firms help shareholders make informed decisions that align with their interests.
The importance of proxy advisory firms stems from their ability to empower shareholders and promote responsible corporate governance practices. By providing objective and independent analysis, these firms help ensure that shareholders’ voices are heard and that corporate decisions are made in the best interests of all stakeholders.
Impact of Proxy Advisors – They are like watchdogs
Proxy firms play a crucial role in shaping corporate governance practices. They help investors understand company agendas, analyse proposals, and make informed voting decisions. Their recommendations can significantly impact a company’s reputation, investor confidence, and share price.
For instance, Global Funds’ recommendation against Deepak Parekh’s appointment as HDFC’s non-executive chairman due to his multiple board positions highlights their influence on corporate governance decisions.
Similarly, InGovern’s recommendations against B.C. Prabhakar, Shardul Shroff, and S.H. Khan for independent director positions emphasize their role in ensuring board independence and preventing conflicts of interest.
A group called Institutional Shareholder Services (ISS) has advised shareholders of Reliance Industries to vote against the appointment of Anant Ambani, the son of the company’s chairman, to the board. ISS is concerned that Anant Ambani does not have enough experience to be on the board.
In the case Lavasa, Ajit Gulabchand was receiving a salary five times higher than what was allowed by the Central government without the shareholders’ approval. Proxy advisory firms investigated the situation and ordered Gulabchand to repay all of the excessive money he had received over the years.
Regulatory Framework for Proxy Advisors
In India, proxy advisors are regulated by SEBI through the SEBI (Research Analysts) Regulations, 2014 (SEBI Regulations) and certain SEBI circulars.
- Proxy advisors in India are regulated by SEBI, but the regulatory requirements are not as stringent as those for investment advisors.
- Proxy advisors do not need to have any specific qualifications or expertise, and there are no restrictions on the matters on which they can make recommendations.
- Proxy advisors are required to share their reports with companies and disclose conflicts of interest, but there is no mechanism for independent review of their recommendations.
- Listed companies can complain to SEBI about proxy advisors, but there is no clear process for resolving grievances.
Challenges faced by the proxy advisory industry:
Many shareholders are unaware of corporate governance practices and do not actively participate in voting on shareholder resolutions. This makes it harder for proxy advisory firms to sway vote results.
Some corporate bodies have been critical of proxy consulting firms, accusing them of prejudice, bad research, and deceiving investors. This has made it difficult for proxy advice services to establish credibility and confidence with enterprises.
Because the proxy advising industry is tiny, there is a lot of competition between firms. This makes it tough for new entrants to compete with experienced players.
In the proxy advising market, experienced individuals are scarce. This makes it difficult for businesses to find and keep suitable staff.
Quality proxy research and analysis can be costly. This might put pressure on proxy advising businesses’ finances.
The stock market’s growth in India has fuelled investor interest in corporate governance. Proxy advisory firms play a crucial role by guiding institutional investors and ensuring transparency for shareholders. Their influence is likely to grow as startups with diverse shareholdings emerge.