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Institutional EYE

Commentary on Corporate Governance Issues

Responsible shareholder engagement: The case for an Indian stewardship code

The thrust of regulations and public norms is pushing companies to embrace best governance practices. This will help them fulfil their responsibilities to the stakeholder - employees, suppliers, distributors, customers, the (local) community and shareholders. But what about investors, who manage your money? At the organisational level, the same regulations apply to them. But in addition, they have a fiduciary duty towards those whose money they manage. How they represent the interests of those whose money they manage is dealt with through a stewardship code. India needs one urgently.

Hermes, an institutional investor, has defined stewardship code as “a set of principles or guidelines aimed primarily at institutional investors, who hold shares, and thus, voting rights in companies. Implying that it is part of the fiduciary duty of investors to behave as good owners of companies, stewardship codes require investors to monitor and, where necessary, engage with companies on material matters, including environmental, social, governance, strategy, performance and risk issues and to vote their shares at company AGMs and EGMs”. First, companies need investors just as much as investors need companies. Consequently, effective stewardship and effective governance go together. For a company to be able to act in an investor’s best interest, it also need to understand the investor’s perspective. The stewardship code does just this. It sets out a framework that encourages investors to engage with companies and their boards. This benefits both companies and investors.

Second, stewardship codes are being rolled out globally. After the UK adopted a Stewardship Code in 2009, about eight other countries have rolled this out, including a few in Asia namely Malaysia, Japan and Taiwan. Singapore and South Korea have set up working groups to develop such a code (see the Annex). I expect these codes to become part of the governance landscape soon.

Three, a stewardship code will build upon the progress that has been made in the Companies Act and the SEBI (Listing Obligation and Disclosure) Regulations, 2015. Both show a strong bias towards governance, be it e-voting, quorum requirements or other steps. All along, the Securities and Exchange Board of India has steadily nudged mutual funds to vote. As a consequence, the asset management industry today has a well thought out company engagement plan. All funds have voting guidelines, they vote, they disclose how they voted and their rationale for voting the way they do on each resolution. The pension funds do vote, but their policies and voting rationale are not in the public domain. The insurance sector is behind the curve. Today, the mutual fund industry, which manages less than two-thirds of the equity assets that the insurance industry manages, has the loudest voice with companies.

How do we roll this out? Happily, help is at hand. A paper on the approach India can take to develop its own Stewardship Code was presented to Finance Minister Arun Jaitley, by the India-UK Financial Partnership (IUKFP) delegation that accompanied UK Prime Minster Theresa May to India last month.

Principles of the UK Stewardship Code

Institutional investors should:

  • Publicly disclose their policy on how they will discharge their stewardship responsibilities

  • Have a robust policy on managing conflicts of interest in relation to stewardship and this be publicly disclosed

  • Monitor their investee companies

  • Establish clear guidelines on when and how they will escalate their activities as a method of protecting and enhancing shareholder value

  • Be willing to act collectively with other investors where appropriate

  • Have a clear policy on voting and disclosure of voting activity

  • Report periodically on their stewardship and voting activities

This paper suggests a “series of recommendations to progressively develop an Indian Stewardship Code”. Based on the UK experience, it advocates a “voting plus” and a “comply or explain” framework, but goes on to say that there should be a committee with representation from the institutional investor community, SEBI, pension and insurance regulators as well as the finance ministry to look at global practices and make appropriate recommendations for the Indian market. India’s rank in a few surveys (the World Bank’s Doing Business report and the ACGA’s CG Watch) has remained unchanged, despite what most believe are substantial steps. (“The message in India’s static ranking”). Not having a stewardship code – more so when other Asian countries are rolling theirs out, risks slipping in the ranks: having an Indian a Stewardship code is now not an option. The building blocks are already in place - regulations that focus on engagement, SEBI’s experience with the asset management industry, increased shareholder engagement. We now need to tie these various strands together in the form of a stewardship code.

A modified version of this column by Amit Tandon, appeared in Business Standard on 28 December 2016. You can access the column by clicking this link or typing:

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