Over the last couple of years, proxy advisory activism has risen in India. Proxy advisors advise institutional investors and shareholders of public companies on matters like they can vote on different issues. The institutional investors do not have enough time and resources to analyze the issues pertaining to companies in their portfolios. An important aspect of proxy advisory firms is their relationship with investor activists. Investor activists seek to push the company more towards addressing shareholders’ needs and considering social, environmental, and governance issues. They may be interested in subjects like workers’ pay, environmental policies, climate change, worker rights, etc.
Recently, one of the biggest companies, India Inc, became a target of proxy advisory activism. On July 19, 2021, Yasir Al-Rumayyan, the governor of Saudi Arabia’s sovereign wealth fund and Saudi oil producer Aramco’s Chairperson, was appointed as an independent director of Reliance Industries Ltd. When the appointment came for shareholders’ voting, the California State Teachers Retirement System voted against the appointment based on the recommendation of a proxy advisory firm Glass Lewis. The advisory firm suggested that Al-Rumayyan cannot be an independent director due to his involvement in Aramco and Saudi Arabia’s Public Investment Fund operations. This example demonstrates how proxy advisory firms can swing critical shareholder votes. A recent study found that two major proxy advisory firms can swing up to 20% of the shareholders’ votes in the US. There are several criticisms against proxy advisory firms. Some of those include:
The Securities and Exchange Board of India (SEBI) tried to address the conflict of interest related to proxy advisory firms in SEBI Regulations, 2014, Section 24(2), which defines a code of conduct for proxy advisory firms. The SEBI working group noted that the conflict of interest of proxy firms could have a catastrophic impact on corporate governance. Thus, the new standard obligates proxy firms to formulate the recommendations for voting decisions and disclose those policies to investors beforehand. Additionally, there will be an annual review of its recommendations and policies.
What Can the Board Do?
It is primarily the Board’s responsibility to prepare for and respond to proxy advisory activism. The Board has to work in coordination with the management and the CEO to identify and respond to activism effectively. Here are some of the things that the Board can do while dealing with proxy advisory activism:
The Board should oversee that the management is working to identify various vectors of potential attacks from the perspective of activists. Such vectors may include strategy, valuation, operational performance, shareholder engagement, capital allocation, environmental, social, or corporate governance. The Board could bring in engaged advisors to defend against such activism.
Once the management and the Board have identified the potential risks, they must think of progressive actions to address those risks. The Board needs to make sure that management takes proactive and timely steps in addressing the identified areas of contention that can most likely bring activist attention. The Board can discuss the areas related to social, environmental, and governance issues with the company’s external advisors to keep the company’s activities to various good governance standards.
The Board can invite the key stakeholders for an interactive dialogue on the issues that concern them the most. This allows stakeholders to understand the Board’s perspective and the executive actions it is taking to maintain the highest standards. Meaningful dialogue between the Board and key stakeholders demonstrates the Board’s commitment to engagement and builds trust amongst the stakeholders. Thus, if an activism campaign occurs, the Board’s engagement with stakeholders can serve as a line of defense.
In the case of an activist campaign, a company should have a well-defined response strategy to address the activists’ claims. The plan must include details about the management, defense team, and external advisors. It should define the roles of each advisor group, board members, and management during an activist campaign. Additionally, the Board can plan its public response and then tailor it to the specific activist situation. This allows the company to control its own public narrative.
Proxy advisory activism can be countered with good governance practices, standards, and policies. The Board needs to continuously evaluate and identify potential areas of attack and those issues rapidly to prevent any proxy activism.