M. Damodaran
Chairperson, Excellence Enablers
Former Chairman, SEBI, UTI and IDBI

In recent years, the behaviour of institutional investors the world over has varied from activism, bordering on adventurism, to indifference, bordering on neglect. Some of them have led the efforts to remove CEOs of companies, while others have turned a blind eye to boardroom standoffs impacting on the reputation and performance of companies. By refusing to take a position on resolutions at AGMs/EGMs, are institutional investors shying away from their responsibilities? Do they not owe it to the stakeholders to take an informed view on important matters? S. Sandilya and Leo Puri offer their take on this issue of topical relevance.

Team Excellence Enablers joins me in wishing you a very Happy 2017.

S. Sandilya
Chairman,
Eicher Group

Leo Puri
Managing Director, UTI Asset
Management Company

The role of Institutional Investors in the overall governance of Corporate India, an oft debated point, has had significant impact in many takeover attempts of companies. Of late it has gained added significance especially in the context of a recent surgical strike in one of the corporate groups.

Who are these Institutional Investors? Typically these are Insurance companies, retirement / pension funds, mutual funds and banks, domestic or foreign, and may include operating companies investing their surplus funds. They may have representation on the boards or may be mere shareholders.

The first category has the onerous responsibility of overseeing the governance of the companies they represent. The nominee directors represent their stakeholders’ interests – stakeholders here include the policy holders as well as shareholders. Therefore these directors have the responsibility to vote on resolutions keeping the interests of all their stakeholders and the stakeholders of the company itself.

Both the categories have influence as shareholders in General Body meetings be it AGMs or EGMs, despite minority holding. They have to take a position and vote on the resolutions.

The boards of Institutions they represent have to define the role of the nominated board member or the person nominated to vote on their behalf; call a special board meeting or empower the Chairman to decide. In any case, the nominee board member must be empowered to decide on the spot if both the above are not feasible under given circumstances. The conclusion is that Institutional Investors must take a position and VOTE.

Abstention is indeed Abdication.

The fiduciary responsibility to be discharged by Institutional Investors effectively stands abdicated if a decisive section of them abstain from voting and in doing so set the seal on a particular outcome. This is especially so in cases where the resolution passed is critical to the future strategy of the company. Invariably in these cases, potential outcomes are binary and at extreme odds to one another. In such a situation if one party starts with a reasonable edge on votes, the abstaining voters take away from the quality of the decision in that the outcome does not have the active support of the majority of shareholders. It then becomes a result favored by a smaller group amongst shareholders which has barely passed muster.

There are rare circumstances, where sufficient information may not be available for an institutional investor to determine a view. If having engaged the company, the situation remains unclear, the investor can choose to abstain, if the matter is not deemed material. However, if it is a material issue, then failure to obtain information may itself be sufficient grounds for voting against the resolution. This sends a strong message that disclosure and communication are expected, as opposed to being taken for granted.

The abstaining voters may ostensibly either profess lack of technical understanding or indifference to the outcome. The former exhibits incompetence while the latter falls short of discharging fiduciary duty. Both of which calls into question the ability of the abstaining voters to discharge their responsibilities as fiduciaries. Abstention in such cases then becomes fiduciary failure posing as innocuous passiveness.