The lone wolf
Anand Adhikari February 6, 2018
The season has just got over for us," says an exhausted Amit Tandon, looking at the deserted cubicles in a 4,000 sq. ft. ground floor Central Mumbai office. Tandon is the Co-founder and MD of Institutional Investor Advisory Services (IiAS), which provides professional advice to institutional investors on corporate governance issues. The season he is referring to is the period towards the end of the first quarter when most companies hold their annual general meetings (AGMs). "Everyone is kind of taking it easy," smiles a clean-shaven Tandon, wearing a black suit.
The smile says a lot, for this ICICI Group veteran, who last headed Fitch Ratings' India office, is facing a `1,000 crore defamation suit from cigarette major ITC. The reason is IiAS' advice to ITC shareholders to vote against a resolution for a monthly remuneration of `1 crore to Y.C. Deveshwar, now the non-executive chairman. For Tandon, who is out on a mission to question the goings-on in corporate India, these challenges are an occupational hazard. He is at ease, just like Inspector Morse, the character of his favourite British TV detective series that he loves to watch and which, perhaps, keeps his investigative instincts sharp
Tandon's job, after all, isn't too different from that of Inspector Morse. At work, he is glued to his laptop - scanning thousands of board resolutions to find hints of lax corporate governance, calling up companies for clarifications and writing theme-based reports for improving governance at companies. A lean staff of two dozen professionals, from auditing to legal, are within a shouting distance in a busy day. The task is huge, for under their watch are 700 large companies, accounting for 90 per cent of India's stock market capitalisation. The end product is a small piece of advice for institutional investors to either vote 'For' or 'Against' a board resolution. The investors may or may not accept their advice but for corporates whose resolution(s) are under the IiAS's scanner, the implications are huge. "Corporates will try and muzzle our opinion, but we will have to wait and watch (the ITC case)," says Tandon, a product of New Delhi's St. Xavier's High School and St. Stephen's College, neither agitated nor distracted by the suit.
In a short span of seven years, IiAS has managed to send shivers down the spine of several big promoters. Be it the Tata Group, Infosys or ITC, IiAS has been giving its opinion on every major issue concerning shareholders. For decades, corporate governance practices were never the topic of discussion, forget a public debate. Even independent directors did not have the courage to oppose promoters.
Not anymore. Recently, in the US, an activist investor, Nelson Peltz, unsuccessfully contested for a board seat at the $65-billion Procter & Gamble. The three biggest proxy advisory firms - Institutional Shareholders Services (IIS), Glass Lewis and Egan Jones - put their weight behind Peltz. India has not seen such investor-activism, but institutional investors are waking up here, too, partly due to the regulatory push.
The Activist Rises
Tandon's career took off with ICICI Group, where he worked for 17 years. "You are given opportunities there," he says. "I did project appraisal and led many discussions with promoters. It gave a sense of empowerment," says Tandon, who rose on to become senior vice president, corporate banking. This was followed by a stint at Fitch Ratings, where he did the job of giving credit ratings to companies. "Tandon has a good understanding of regulations and business environment," says Navneet Munot, CIO, SBI Mutual Fund.
Tandon also handled the corporate pressure that comes with the 'opinion'. "We never got any pressure," smiles a politically correct Tandon. But when he left Fitch in 2011, a consumer durables player and a Kolkata-based infrastructure company challenged Fitch's decision to downgrade their ratings.
The idea to start a proxy advisory firm came to him while he was in Fitch. He discussed it with industry veteran Anil Singhvi, who said they would need broader acceptance. He suggested institutional backing. Without it, IiAS would become like Anna Hazare, he said. They started pitching the idea to institutions. When Tandon told his global boss, Bernard de Lattre, Fitch's Chief Financial and Administrative Officer, about his decision to quit, Lattre asked him about his future plans. "Can we invest with you?" they asked. Lattre discussed the idea with Peter Jordon, the head of commercial operations in Fitch's New York office. Between December 2011 and June 2012, the Tatas, HDFC and ICICI Group, among others, committed backing. "None of them has a seat on the board," says Tandon, dispelling worries over conflict of interest.
IiAS has credibility because of its top-notch board members. Apart from Singhvi and Tandon, the five-member board has Deven Sharma, former president of Standard & Poor's, Robert Pavrey, a chartered accountant, and Renuka Ramnath, who built private equity firm Multiples into a $1 billion concern. "IiAS carries a fair amount of credibility. Tandon comes from a ratings background. There is also comfort about corporate governance because of large institutional holding," says Anup Maheshwari, CIO, DSP BlackRock Mutual Fund
So, how do they scan hundreds of companies, thousands of resolutions, numerous board meetings and AGMs? "We own one share in each of the 700 companies we track," says Tandon. This comes in handy for seeking clarifications. "Some companies share the information, some don't," he says.
As Fitch head, Tandon was giving opinion on companies' ability to repay debt. Now, his target companies are the same, but the focus is governance practices. But, unlike corporates, institutional investors pay him for the service. About calls from promoters or friends, he says: "They may have a point of view. We have our point of view." For example, HDFC Group is one of the shareholders of IiAS, but when the merger of HDFC Life and Max Financial was announced, IiAS opposed the payment of a hefty non-compete fee to Max Financial. It is a different matter that the merger didn't go through because of other complications.
IiAS claims it is modelled on US-based Institutional Shareholder Service (ISS) which, along with Glass, Lewis & Co, is among the two biggest proxy
advisory firms. Globally, proxy advisory firms actually collect proxies on behalf of investors, whereas Indian firms are in the advisory space, as regulations doesn't allow them to collect proxies. "That's the core difference," says Tandon.
Investor Pay Model
The first big task for IiAS was to get clients. IiAS's first mandate was from TCI Children Fund - a company referred by Anil Singhvi, another co-founder. "Ours is an investor pay model," says Tandon. The institutional investors didn't like the idea of opposing the powerful promoters. "In 2011, the concept was new and it was difficult to convince institutional investors," says Tandon. Institutional investors used to just sell the shares in case of governance issues. "It was hard convincing institutional investors initially. For some, our entry was a blessing in disguise. It was easy for them...doosre ke kandhe pe rakh ke bandook chalana," grins Tandon.
A proxy advisory firm has the power to influence shareholders, but the job comes with huge responsibility. Globally, corporate houses have been fighting pitched battles against institutional investors and proxy advisory firms. IiAS, too, is facing its first big test - ITC's defamation case in response to IiAS's contention that payment of `12 crore annually to Y.C. Deveshwar is not beneficial to shareholders. While ITC managed to pass the resolution, it filed a defamation suit.
Do proxy advisory firm have enough tools to make a case against a compensation resolution? Tandon says they rely on information in public domain. ITC's defamation case also raises the issue of regulation of proxy advisory firms. At present, SEBI puts proxy advisors on par with research analysts, who give buy and sell recommendations. The proxy advisors, however, have to provide additional disclosures regarding the extent of research and accuracy of data policies.
Global proxy advisory firms have matured over the years. The business started in the mid-'70s in US when the Employee Retirement Income Security Act, 1974 (ERSA) came into effect for
protecting the interests of pensioners. The law gives pension funds the power to vote responsibly on resolutions of investee companies. Since the funds found it difficult to track hundreds of companies, proxy advisory firms started mushrooming. ISS was founded in 1985, Proxy Monitor came in 1989, and Glass Lewis in 2003. In India, the biggest trigger was SEBI's 2014 order to mutual funds to disclose the rationale for voting on various resolutions of their investee companies. In 2010, Shriram Subramanian set up the first proxy advisory firm, In Govern. Another such firm is Stakeholders Empowerment Services, set up by former SEBI Executive Director J.N. Gupta. Munot of SBI Mutual Fund says these firms are evolving. "At times, there is no straight forward 'yes' or 'no' and you need an advisor to assist you. We find IiAS helpful," he says.
A few months ago, the insurance regulator also asked insures to disclose how they vote on investee companies' resolutions along with the rationale. This will force insurance companies to take help from proxy advisory firms.
Setting the Agenda
IiAS also publishes thematic pieces. Some of the recent write-ups have covered topics such as women on boards, royalty payments outpacing profits and corporate social responsibility. "They come up with thought-provoking corporate governance themes. So, it is not a mechanical evaluation. They are trying to take a deeper of how governance practices should evolve," says Maheshwari of DSP BlackRock Mutual Fund. "We try to stay relevant throughout the year," says Tandon.
The business model, however, is still evolving. "We initially thought we will sell individual action reports (such as on M&A, demerger)," says Tandon. But when they started operating, they realised this won't work. IiAS was initially engaged by private equity firms. Now, the core clients are mutual funds, insurers, foreign institutional investors, domestic pension funds and high net worth individuals. "It was a learning for both us and clients," says Tandon. "We have seen institutional investors who were not even reading the resolutions are now analysing them carefully," says Tandon.
The proxy-advisory business is expected to grow as corporate governance takes centre stage. Institutional investors as well as portfolio advisory companies are already taking up issues wherever they feel the decision is not in the interests of shareholders. Issues such as managerial compensation, related-party transactions, valuation, protection of minority shareholders' interest keep hitting headlines.
"The good thing is that institutional holding in companies is going up. The institutions have also started voting," says Tandon. Absenteeism, which was 26 per cent three years back, is now 10 per cent. There is more awareness now but this seven-year-old firm is also making the right noises. "A lot needs to be done," says Tandon, who is scouting for the next big issue to create a buzz in the corporate world.
Tandon is a busy man. Ask him about the most satisfying moments of his job and he says in a lighter vein that they have bragging rights on Nandan Nilekani's comeback. IiAS was the first proxy advisory firm to root for Nilekani after the fight between founders and professionals came out in the open. Infosys' Vishal Sikka resigned as CEO at 9 am on August 18. "Our report suggesting Nilekeni for the top job was up at 12," says Tandon, who has a defamation battle waiting for him. The case will also decide the fate of the fledgling proxy advisory firms in India. But this Inspector Morse enthusiast is enjoying the game. "While none of us knows what will happen in the end, we are very enthusiastic about what we are doing," he says.