Proxy advisory firms push for more changes in corporate boardrooms

With a few US-based investors voting against the reappointment of Deepak Parekh on the board of Housing Development Finance Corporation (HDFC) on the advice of proxy advisory firms in the US, the spotlight is once again on corporate boardrooms.

One US proxy advisory firm asked shareholders to vote against anyone who is on boards of more than five public limited companies as it would be a constraint for that executive.

“Investors may be concerned whether directors are able to fulfil their fiduciary responsibilities when they are serving on a large number of boards, as in this case,” noted a report by international proxy advisory firm Institutional Shareholder Services Inc. Proxy advisory firms help institutional investors decide on how they should vote on company resolutions. Another such firm Glass, Lewis & Co also advised against appointing Parekh saying that the board is not sufficiently independent.

Typically on boards of India Inc, non-independent director tend to hold on longer but serve on fewer boards than their independent counterparts. The average (median) non-independent director typically serves on the board of a single company, while an independent director serves on two boards. The median tenure of the independent director is five years, while it is seven years for non-independent directors according to data on BSE 500 companies by corporate-tracker Prime Database. The analysis looked at 1,524 non-independent directors, and 1,462 independent ones.

Shriram Subramanian, founder and managing director of domestic proxy advisor InGovern Research Services said that boards should typically be younger, as suggested by recent regulatory changes. For example, he said that the Kotak committee recommendations on corporate governance reforms pointed to the need for younger board members. Also, the Companies Act of 2013 says that executive directors above the age of 70 years can be in continuance of employment only if shareholders approve such appointments by a special resolution. Older directors invite even more scrutiny.

“If there is a board where many directors are above 75 years, we look at the average age, the reason and contributions made by the board members, whether the company has outlined concrete succession plans and make appropriate recommendations," says Shriram Subramanian, founder and managing director, InGovern Research Services.

“We had recommended in favour of Parekh’s appointment, however, had flagged off his excessive commitments on various boards. His 100 per cent attendance and performance work in his favour. Further, SES has flagged the issue of high average age of the directors at HDFC. We recommended voting against reappointment of J J Irani, Bimal Jalan and B S Mehta due to long association,” said J N Gupta, co-founder and managing director of domestic proxy advisory firm Stakeholders Empowerment Services.