Don't always go by proxy advisors' views

If there's a great business with management record, ignoring minor hiccups can benefit you in long run

In the past couple of years, proxy advisory firms have been flagging corporate transactions that do not favour minority shareholders. But their views can be confusing as well. Especially if one advisor favours a transaction while another isn't too happy. For example, reports with different views on Maruti Suzuki's proposed contract manufacturing arrangement with Suzuki Motor Company in Gujarat have left investors confused.

Among the three proxy advisory firms in the country, Investor Advisory Services India (IiAS) and InGovern are against the proposal, while stakeholders Empowerment Services (SES) favours it. As these firms have strongly voiced their opinions for the first time, some observers say there could be lobbying involved on behalf of clients, and, therefore, some might have biased views.

Bala N Balasubramanian, adjunct professor, Indian Institute of Management (IIM) Ahmedabad, and also a part of SES' advisory board, explains that proxy advisory firms cater to foreign and local institutional investors offering a relatively low-cost analytical input to base their voting decisions upon. They also provide some expert advice to retail investors for which they might or might not have the time or expertise. Increasingly, long-term retail investors are relying on them.

Asish K Bhattacharyya, head - School of Corporate Governance and Public Policy at Indian Institute of Corporate Affairs, says these firms depend on earnings from mutual funds and institutional investors for their survival and growth. Moreover, they have to maintain a healthy relationship with companies. Therefore, their internal governance is always under stress. But, the views of these companies might genuinely differ because judgment depends on the perspective developed by an individual or a team.

Ashok Banerjee, professor (finance & control) at IIM Calcutta, says these advisory firms provide a much needed service. But the only area of concern is the degree of 'bias' in the recommendations. He recommends investors should, therefore, look at the profile of the promoters and the management of such advisory firms. Investors should also check if the people sitting on the board of directors can lead to any conflict of interest. Opt for the one where they see the management of the firm won't face pressure from clients, promoters or directors.

J N Gupta, co-founder and managing director of SES, says nothing can replace one's own judgment. While an investor can look at the views and reasons of the proxy advisory firms, at the end of the day, they should use their own judgment to take a call on whether to subscribe to the view. While doing this, they should keep their emotions aside.

Sanjay Bakshi, professor at Management Development Institute, Gurgaon says investor should not outsource decision-making to someone else. Rather, use the information to take a call. Sometimes proxy advisors might take a high moral ground without realising the actual problem. He cites an example of a dispute in a family-owned business, where the company could be going for restructuring of business. "There are chances that analysts might pan it down, but things may actually become better and more focussed afterwards," says Bakshi. He adds there are always shades of grey in a business. Investors should realise it takes lot of hard work to build a business and run it successfully. If there's a great business with exceptional management, it would help ignore minor hiccups.

Retail investors who care for maximising the returns alone, would go along with the management of a company so long as their expectations are met, says Banerjee. If retail investors are unable to make up their mind about a transaction because of highly conflicting views, it's best they liquidate their holdings.