On August 6, the Financial Times of London reported that ‘Unilever had turned the corporate governance debate on its head by asking 10 of its major shareholders to account for their failure to register their votes at its last annual meeting’.
In doing so, Unilever has opened an interesting new chapter in the corporate governance debate, where a company asks its shareholders — especially its large and powerful institutional investors — why they are not doing their job of keeping an eye on management actions.
In the Unilever case, its decision to question institutional shareholders may have been the result of three of its 10 institutional shareholders saying that the balloting process somehow failed when they tried to vote. The company is apparently investigating their feedback, but has also invited the Department of Trade and Industry to observe its inquiry, says FT.
The FT report suggests that Unilever’s “unorthodox questioning of its own shareholders will add to the pressure on institutional investors to be more active custodians of their clients’ money”. It also appears to think that while Chief Executives usually took the brunt of external scrutiny, institutional investors too may increasingly be asked to “justify their own performance in overseeing boardrooms”.
Does Unilever’s action really herald a change in corporate attitudes? Would companies prefer alert investors to silent and ignorant ones? Unilever has clearly linked the failure of institutional investors to vote, to the “current corporate governance climate”. It has invited better participation from them and expressed its willingness to talk issues through.
But Unilever may just be an exception to the general rule that companies prefer their shareholders to remain silent. If Unilever indeed kicks off a new trend in the corporate world, what kind of behavioural change can we expect from India’s financial institutions in their role as shareholders? Probably nothing. This column has repeatedly pointed out that Indian institutional investors (in their capacity as lenders, large institutional shareholders and nominee directors who have a ringside view of corporate decisions) have repeatedly failed minority investors. And private mutual funds have only occasionally voted with their feet and dumped stock after bad management decisions.
Also, the Narayana Murthy Committee’s attempt to make institutional nominee directors more accountable by asking them to seek election by the general body was rejected by the Securities and Exchange Board of India board. From the Indian point of view, Unilever’s action has implications that are even more interesting. Investor activists in India fought a hard battle to expand the list of issues that require companies to get a special resolution approved by the general body of shareholders and to have postal ballots made mandatory for certain resolutions.
Corporate India, on the other hand, has fought hard against the introduction of section 192A in the Companies Act, increasing the scope of special resolutions and mandating postal ballots. It has also refused to accept that sensible use of technology would enable companies to conduct postal ballots easily and inexpensively. That’s because many Indian industry groups has made a fine art out of structuring vague omnibus resolutions. Their opaque resolutions are designed to allow companies to expand, merge, demerge, delist or amalgamate their entire operation or any part of it; to expand into a variety of new businesses; and to lend or borrow money or expand and shrink capital, without repeated permissions from investors or unnecessary disclosures to them. Such resolutions have allowed some of our largest industry groups to divert bank and institutional funds to new businesses and siphon out money. They got away with it because institutional investors remained mute spectators in their capacity as investors, lenders and nominee directors.
One may argue that Unilever wasn’t really asking institutional investors to make their presence felt as much as it was checking to see if it could depend on their support, when tougher issues came up for vote at shareholders’ meetings in the future. Whatever the intention, Unilever’s action provides an interesting benchmark for future change.
But for the present, Unilever will probably remain exceptional in its decision to demand more involvement from institutional investors. A Reuters report last week shows that companies around the world not only like their investors to remain silent, but prefer their directors to remain silent too.
Brendan Intindola of Reuters recently reported a study of corporate culture which finds that “directors who speak up get shut out” by the ruling management clique. The study was conducted by two Texas University Management Professors, James Westphal and Poonam Khanna and titled “Social Distancing as a Control Mechanism in the Corporate Elite.” It reportedly found that directors who participated in one of four “elite-threatening” actions — separating the chairman and CEO, creating independent nominating committees, firing the CEO, or repealing a “poison pill” takeover defence — were invited to 50 per cent fewer informal meetings and their input was solicited on 53 per cent fewer occasions in formal board meetings.
Directors on the board of most Indian companies would vouch the veracity of the Texas professors’ findings. Our most famous example is the unceremonious ouster of SS Tinaikar (former Municipal Commissioner of Mumbai) from the board of Voltas Ltd in the early 1990s, when he demanded better accountability. Mr Tinaikar, had no problem taking on Shiv Sena corporators, who frequently bayed for his blood, but was manoeuvred out by corporate India’s crony-club. More pertinently, no major company ever invited him to ‘grace’ its board of directors. Yet, corporate India and its lobbying organisations would have us believe that there is an acute scarcity of ‘director’ material in the country. That is why corporate leaders like JJ Irani are furious at attempts to cap the retirement age of company directors at 75.
But look around you and you will find that corporate India rarely invites upright and outspoken bureaucrats or regulators to their boards, even though many are only in their sixties and eminently qualified to make significant contribution.
The only way to break the crony-club is to legally mandate board reforms. But with the SEBI board rejecting the proposal to eliminate the concept of ‘nominee directors’ and the Department of Company Affairs having cold feet over the age cap of 75 for company directors (part of the Company Act Amendment Bill, 2003) — we in India can forget about legally mandated board reform. Our regulators are too timid to force such drastic change on Indian companies. -- Sucheta Dalal