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Increasing the role and relevance of ‘Proxy Advisory Firms’ in corporate governance

Until very recently, the recommendations of proxy advisory firms did not impact companies much, as it did not have the power to influence or fail/ stop a resolution from being passed. However now, the recommendations of proxy advisory firms are becoming increasingly relevant given that many institutional investors are basing their positions while voting on resolutions on such advice. This is evidenced from the fact that a proxy advisory firms have recently managed to prevent a resolution for granting employee stock options to employees of a group entity of a very large Indian bank from being passed due to the absence of “any compelling reasons”.[1] In another interesting case, a proxy advisory firm came very close to preventing a resolution pertaining to an increase in the remuneration of a director from being passed on account of this increase being “skewed” and “guaranteed”.[2]

It is paramount to note here that proxy advisory firms provide recommendations on inter alia, two key fronts, which are legal/ regulatory compliance and governance risks. The thresholds that proxy advisory firms use to map and check for governance compliance are non-legal thresholds, i.e., these do not have the binding force of law and are solely from the perspective of a ‘good to have’ as opposed to ‘must have’. Ordinarily such thresholds are higher than the threshold prescribed under applicable law.

Given that proxy advisory firms are now influencing voting, the thresholds and standards used to evaluate corporate governance are now slowly taking the shape of ‘must haves’. Regardless of being legally compliant, if a company has a vast shareholder base or large public shareholding, it is more than likely that their resolutions will get rejected if they fail to adhere to the standards set by proxy advisory firms.  

While proxy advisory firms are growing, some of the key players in the space are Institutional Investor Advisory Services (IiAS), InGovern, Stakeholder Empowerment Services (SES) and Glass Lewis. The length and breadth of the companies they cover is expansive. With SES releasing more than 1,000 reports annually and IiAS covering more than 1,000 companies, it is safe to assume that apart from the large companies, even the new age companies would get covered and everyone would start paying attention to their recommendations.

Regulations covering ‘Proxy Advisory Firms’

Proxy advisors are defined under regulation 2(p) of the Securities and Exchange Board of India (Research Analysts) Regulations, 2014 (“SEBI Research Analyst Regulations”), as “any person who provides advice, through any means, to institutional investor or shareholder of a company, in relation to exercise of their rights in the company including recommendations on public offer or voting recommendation on agenda items”.

Proxy advisors in India are primarily regulated by the SEBI Research Analyst Regulations and the Procedural Guidelines for Proxy Advisors, dated August 3, 2020 (“Procedural Guidelines”), while their counterparts in other jurisdictions are largely unregulated.

Drawbacks of reports on governance issues by proxy advisory firms in India

Most proxy advisory firms have adopted Western governance standards and hence are more suitable to cater to the requirements of companies operating in the West. It is imperative that these standards are revaluated from an Indian perspective before applying them to Indian companies, which often have different realities to deal with.

Since these standards are not legally mandated or required, implying that these effectively push the threshold of governance regulation. For instance, the separation of the ‘MD/CEO’ and ‘chairperson’ posts, while used as a corporate governance standard, is not legally mandated and SEBI has made it voluntary for companies to separate these posts under the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“LODR Regulations”). Another instance where the corporate governance standard differs is in relation to the term of independent directors. While under the LODR Regulations and the Companies Act, 2013, an independent director cannot be reappointed for more than two terms of five years each, it is important to note that this requirement came into effect from April 1, 2014, and hence any person who was already serving as an independent director prior to April 1, 2014, would have another 10 years to serve. Proxy advisory firms on the other hand take the view that upon completion of the 10-year mark, the director will lose their ‘independence’ and hence an independent director’s term should not be extended beyond the 10-year mark.

It is essential to understand that a templatised minimum corporate governance threshold will only cause more governance issues as different companies have different requirements, depending upon their structure, growth and background. For instance, while a proxy advisory firm might make a recommendation that it is not justified for the company to grant ESOPs to certain class of employees at a discount or on more relaxed terms, it would also not be appropriate to link the vesting of ESOPs granted to a member of the support staff to the company’s performance targets.

It is essential to understand that governance should not be hard coded upfront because it will be impossible to have a one structure/ framework to fit all. Further, by hard coding a minimum threshold for corporate governance, we take away the discretionary power that is vested inter alia in the Board of Directors and the Nomination and Remuneration Committee pursuant to Section 178 of the Companies Act, 2013, to make these decisions, which are likely more informed about the affairs of the company and other confidential information, which a proxy advisory firm may/ will not be privy to.

How can companies minimise the possibility of pushback by proxy advisory firms?

Proactively making ‘sufficient’ disclosures

Section 102 of the Companies Act, 2013, mandates certain disclosures in the explanatory statement issued, along with the notice calling for the shareholders meeting/ postal ballot notice, which include:

  •   A statement setting out the following material facts concerning each item of special business to be transacted at a general meeting, shall be annexed to the notice calling such meeting, namely:—
    • he nature of concern or interest, financial or otherwise, if any, in respect of each items of— (i) every director and the manager, if any; (ii) every other key managerial personnel; and (iii) relatives of the persons mentioned in sub-clauses (i) and (ii);
    • any other information and facts that may enable members to understand the meaning, scope and implications of the items of business and to take decision thereon.
  • Where as a result of the non-disclosure or insufficient disclosure in any statement referred to in sub-section (1), being made by a promoter, director, manager, if any, or other key managerial personnel, any benefit which accrues to such promoter, director, manager or other key managerial personnel or their relatives, either directly or indirectly, the promoter, director, manager or other key managerial personnel, as the case may be, shall hold such benefit in trust for the company, and shall, without prejudice to any other action being taken against him under this Act or under any other law for the time being in force, be liable to compensate the company to the extent of the benefit received by him.

From the above, it is evident that penalty is imposed on account of “non-disclosure or insufficient disclosure” and also the company is required to disclose “the nature of concern or interest, financial or otherwise and any other information and facts that may enable members to understand the meaning, scope and implications of the items of business and to take decision thereon. While section 102(1), read with 102(4) of the Companies Act, 2013, creates an wide threshold of regulation, it is pertinent to note that a company is expected to ideally provide ‘sufficient’ reasons and information pertaining to why it is seeking to make certain decisions.

This is also evidenced from the fact that in most instances where proxy advisory firms have recommended to vote against a resolution, it has been on account of the company not providing a clear rationale for the proposal.

Rectification upon intimation – late but not too late

The Procedural Guidelines have put in place some guard rails to allow a company to correct any inadvertent errors/ omissions/ non-compliances that are flagged by proxy advisors through a mandatory consultation requirement between the proxy advisors and the company, under guideline no. 1(e), which states that “Proxy Advisors shall share their report with its clients and the company at the same time. This sharing policy should be disclosed by proxy advisors on their website. Timeline to receive comments from company may be defined by proxy advisors and all comments/ clarifications received from the company, within timeline, shall be included as an addendum to the report. If the company has a different viewpoint on the recommendations stated in the report of the proxy advisors, then proxy advisors, after taking into account the said viewpoint, may either revise the recommendation in the addendum report or issue an addendum to the report with its remarks, as considered appropriate”. The company should ensure that it uses this opportunity to respond to the proxy advisory firms that have recommended to vote ‘against’, as the best way to showcase that the company is being operated in a transparent manner and to provide their perspective on why the proposed resolution should be approved. However, companies must ensure that no material new information is provided to the proxy advisory firms, as this would raise questions on whether the explanatory statement disclosures were complete or not.


Proxy advisory firms have become a means for shareholders to outsource key decision making to third party experts, and unlike the shareholders themselves, such firms may not have any skin in the game. Companies should ensure that prior to conducting shareholder meetings, they take into account corporate governance standards and ensure that the resolutions are as detailed as can be, without disclosing confidential information. It is crucial that companies start putting in place mitigation strategies to respond to unfavorable reports/ recommendations by proxy advisory firms.

[1] We note that based on recommendation by a proxy advisory firm, an EOSP scheme which was approved and adopted by a listed bank, was rejected in a shareholders meeting from being extended to the group companies with a 58-42% vote, primarily due to public shareholders voting against it due to the proxy advisory firms recommendations.

[2] We note that the proxy advisory firm had recommended against allowing for an increased remuneration to be given to a director of a financial services company, which very narrowly got the 2/3 majority for approval by the shareholders. It is pertinent to note that the members voting against were primarily institutional investors, which shows that the report of the proxy advisory firms was in fact being given due weightage by them.