Shareholders vote on decisions that exceed the powers of the board
More than 30 items are put to shareholders to vote. A quick look at what is put to vote will show that this covers a wide gamut of actions. A few have strategic implications like a merger or a divestiture and issuance of equity capital while others like creation of charge or change in board size, are routine. Some like approval for related party transactions might be operational in nature while others legally required viz. approve not filling a casual vacancy in the board. The items vary by country: in many countries acquisition decisions are delegated to boards and shareholder approval is discretionary.
What matters to investors
How should companies and boards respond to investors vocalising their opinions through their vote? The starting point is for boards to understand what investors expect. This will be achieved by rethinking the role of the stakeholder relationship committee. I will touch upon this in a while.
There are some resolutions that investors are unlikely to oppose - like dividend - but it's not always so straightforward as different investors have different objectives, and even when the objectives are the same they are not in agreement among themselves regarding the best path. For example, foreign investors focus on the independent directors: experience, the skills they bring to the boardroom, the number of boards, diversity. Domestic investors hold the promoters responsible for the outcomes, and are ambivalent towards who sits on the board - till events take an unfortunate turn. Then the board matters.
Rather than go through the entire set listed above, let me focus on a few.
Related party transactions remain critical as this gives controlling shareholders the ability to tilt the scale in their favour. With a majority of minority vote regulations now in play, the controlling shareholders' influence has diminished, the reputation and credibility matters: a management with the reputation of being "fair" to minority investors will garner greater support.
Compensation has and will always remain contentious. While the amount can always be debated, boards should focus on the structure: pay should be linked to performance, focus on the long-term, and aligned with shareholder interests. The overarching preference of investors is that part of the compensation be linked to performance. The converse of this is that investors are more likely to vote against remuneration resolutions because of a disconnect between pay and performance. This also implies that boards need to guard against frequent upward revision in salaries as these break the link between pay and performance. While the Indian market is still some distance away from transparency regarding the benchmarks on variable pay, investors are asking for this data in the US and other markets. Compensation committees should expect some pressure to provide this data.
Another aspect of compensation where there is pushback is "family compensation". Quite a few mid- and small-cap companies have a number of family members in executive roles, each of whom is well rewarded. Aggregating the family take slices off a good bit from the profit pie.
Employee share option plans (Esop) come under close investor scrutiny. Till a few years ago it was primarily the banks and IT companies that were issuing Esops. Today, while Esops are far more pervasive, investor attitude towards them has changed. Till some time back, investors were willing to accept Esops on a par with or at a steep discount to the market price, justifying it as deferred compensation. Today, with the change in accounting rules, investors like to see Esops being issued at the market price. This also more fully aligns the interests of the employee with that of the investor.
While Esops face investor scrutiny, their modification face investor ire. The view is that ESOPs are pay-at-risk and if the share price has come off, a mid-term repricing to make employees whole again is changing the rules in the middle of the game. They would rather a company launch a fresh scheme rather than modify the existing one.
Fundraising either by way of debt or equity matters. Raising equity dilutes existing shareholders so they would rather companies borrow. But excessive borrowings can put companies to risk. Further borrowing in subsidiaries does not require shareholder approval, and once approved, the borrowing limit stays till it is exhausted. Investors increasingly engage more regularly with companies to understand how boards think about their capital structure.
While the above may summarise how investors typically think about resolutions, resolutions put to vote have a context that needs to be explained to get the desired outcomes. To achieve this, companies must rethink the role of the stakeholder relationship committee.
In several companies, stakeholder relationship committees are just a slightly modified version of the erstwhile shareholder grievance committees. In this digital era when shares are dematerialised and do not have the pain associated with the transfer of physical shares, and when dividends are directly credited, "grievances" are negligible. Therefore, the Companies Act, 2013, correctly changed the title to Stakeholders' Relationship Committee. It was tasked with a two-way communication with all stakeholders - but we will focus on shareholders in this discussion. This committee should be supported by a strong investor relations team, who will keep themselves updated with not just who their current and potential investors are, but also scan the landscape to see what shareholders are thinking, how they vote and why they vote the way they do. Companies have been dismissive about the value of the annual general meeting (AGM) -because e-voting has already decided the fate of the resolutions, and that the "wrong" set of shareholders attend AGMs. But companies need to make an effort to make their AGMs meaningful and encourage the "right" set of shareholders to attend. This is, perhaps, the largest forum a company will have to engage with its shareholders - and listen to what they are saying.
Times have changed and companies must proactively build investor trust.
The author is founder and managing director, Institutional Investor Advisory Services of India Limited