In this large automobile company, the proposal to compensate some Whole-Time Directors and the family of a former Managing Director did not survive the test of shareholder scrutiny. As the company discovered, sharing of complete information, in a transparent manner, with the shareholders, was the way out. Should wisdom dawn only when rejection kicks in?
- One of India’s largest companies sought shareholder approval in July, 2014 for payment of compensation, in excess of the limits prescribed by law, to two serving Whole-time Directors (WTDs) and the legal heir of the former MD (since he had passed away).
- The proposal was for the compensation to be paid that year, and to ratify the payment already made the previous year. The compensation was apparently as per their terms of appointment, but the Company had to seek shareholders’ approval due to inadequacy of profits.
- Law mandates shareholders’ approval (in the form of a special resolution) in case the Company has inadequate profits.
- Nearly 30% of the votes were cast against the resolution. Two-thirds of the financial institutions, which together held a 37% stake in the Company, voted against the resolution.
- Explaining the negative vote, an institutional representative stated that the fourth quarter losses were more than double of those in the corresponding quarter of the previous year.
- A spokesperson of the Company mentioned that the structure of the remuneration proposals, outlined in the three special resolutions was established, fully communicated and approved during FY 2012-13. These proposals were consistent with market benchmarks and based on a series of metrics relating to the Company’s overall performance and health, and aggressive implementation of strategies for future growth.
- In December, 2014 the Company approached the shareholders, addressing their concerns by highlighting that the remuneration paid / payable to its executives were in line with the industry standards and Board level positions held in similar sized companies.
- In January, 2015, 6 months after shareholders had rejected the proposal, the Company obtained shareholders’ approval for the proposed increase.
- On obtaining shareholders’ approval, the Company said inter alia that the positive results are an endorsement of the Company’s disclosure and governance policies.
- In case the resolutions had not been approved, the Company would have had to reclaim the excess compensation already paid to these executives (since the resolution pertaining to the previous year had come to the shareholder for ratification).
- This was the first time in India that a resolution on executive compensation was rejected.