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Appointment of Executive Directors and Approval of their Remuneration – Proxy Advisory Perspective - MMJC
Proxy advisors are intermediaries registered with Securities and Exchange Board of India (‘SEBI’) who provide guidance to shareholders for voting on resolutions proposed by listed companies. Guidance on voting to shareholders is based on proxy advisory voting guidelines. Resolutions proposed by companies are assessed on these parameters and then guidance is provided to shareholders. These voting parameters are technical (i.e. legal) and governance based. These parameters are different for different types of resolutions. These voting guidelines are made available in public domain by proxy advisors.
In this article we are listing down the various reasons given by proxy advisors based on their voting guidelines while making against recommendation on resolutions relating to appointment /re-appointment and remuneration of executive directors. Proxy advisors recommend voting ‘Against’ citing following reasons:
Re-appointment of Executive director:
Retirement by rotation:
In terms of section 152 of companies act 2013 at least 2/3rd of the directors shall be liable to retire by rotation unless the articles provide otherwise. If the board of directors is compliant with number of directors liable to retire by rotation and if a new director is being appointed who is not liable to retire by rotation, then this might lead to change in composition of board of directors. This change in composition would result in violation of relevant provisions of companies act and relevant SEBI regulations. Considering this proxy advisors recommend voting against the resolution citing legal concerns.
Sometimes in the resolution there is an inadvertent lapse in mentioning whether the director proposed to be appointed is liable to retire by rotation or not? This might to lead to confusion in the minds of shareholders as to whether the appointment of director is for a perpetual period? Proxy advisors highlight companies to mention whether the directors proposed to be appointed are liable to retire by rotation and recommend voting against the resolution if the director is not liable to retire by rotation?
Profile:
Excessive time commitments: Re-appointment of executive directors holding two full time positions within the same group are recommended to be voted against citing governance concern. Companies act, 2013 allows holding of two full time positions by an executive director[1] but proxy advisors have a view that by holding two full time positions directors would not be able to devote time for each business even if the businesses are same and within the same group.
Holding position as Chairman and Executive Director: Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015 [‘SEBI LODR’] allows holding of position of chairman and managing director by one and same person[2]. Further companies act 2013 also allows to hold same positions by one person[3]. Proxy advisors raise concern on this aspect. Proxy advisors are of view that if one person holds position as a chairman and managing director then this may lead to excessive concentration of power in the hands of a person. Hence
- reappointment of an executive director who is also the chairpersons is recommended to be voted against.
- Dual positions in different business: Re-appointment of executive director is recommended to be voted against if the director holds full time positions in two businesses that are unrelated as this might lead to director not able to devote time for each business.
- Integrity: Appointment or re-appointment of director who has been penalized by any regulatory authority for any violation in his individual capacity or professional capacity or if a director is already holding full time positions in another company and concerns are raised by regulators or government over the functioning of the company then resolution is recommended to be voted against. Also, shareholders are advised to seek details from the company for recommending such directors.
- Attendance: Proxy advisors assess the interest taken by executive directors in running the affairs of business. This is assessed by the attendance of the executive directors at the board meetings, committee meetings and general meetings.If the director has not been attending general meetings or board meetings very frequently then his re-appointment is recommended against.
Remuneration of executive director
Components of remuneration: Remuneration of directors generally comprises of two components (i.e. fixed salary and variable salary). If the resolution proposes a higher fixed salary component, then concerns are raised by proxy advisors. Fixed component salary is considered equivalent to work without performance. With respect to the variable component proxy advisors check whether there is cap on variable pay. If there is no cap in variable pay then concerns are raised as such pay structure might lead to payment of excessive remuneration to executive directors. Pay structure of directors needs to be balanced with fixed and variable pay otherwise proxy advisors recommend voting against these resolutions.
- Remuneration of executive director vs board of directors as a whole: Remuneration paid to executive director if it is more than remuneration paid to other executive directors forming part of the board then concerns are raised on such diverse remuneration practices. Disparity in remuneration within executive directors with similar qualification, experience and role/ charge is recommended to be voted against. Shareholders are also advised to question the company on such practices.
- Increase in remuneration not in sync with company performance: If the company has grown by 10% and increase in remuneration is proposed to be done by 70% then questions are raised as to what is the rationale for such an increase in remuneration being proposed? If adequate rationale is not seen then resolution for such an increase in remuneration is recommended to be voted against
- Increase in remuneration vs performance of executive director during the term: Variable pay component of executive directors’ compensation is linked with performance targets set. Proxy advisors assess performance of company against these targets set. If it is seen that the performance targets set are not achieved then performance pay is questioned. Also, companies are now linking pay packages of directors with ESG targets. So, if company has not made progress with respect to ESG parameters then variable pay is questioned. In such scenarios proxy advisors recommend voting against the resolutions.
- Skewed remuneration in case of promoter director: In few cases it was seen that executive directors belonging to promoter category were drawing more remuneration than the directors in non-promoter capacity. On analysis it was also seen that the qualification, remuneration, experience of non-promoter director was more than that of the promoter directors. Inspite of this fact the remuneration increase proposed for promoter director was hefty as compared to a more competent person on board. In such scenarios resolutions are recommended to be voted against and shareholders are asked to seek clarity from company on such remuneration policy.
Conclusion
Proxy advisory recommendations on resolutions to be passed by companies paly a crucial role. Shareholders base their decision considering opinions by proxy advisors. Above pointers need to be kept in mind while drafting resolutions in order for them to withstand the proxy test.
This article is published in Taxmann. The link to the same is as follows: –
This article is written by CS Vallabh M Joshi – Senior Manager – vallabhjoshi@mmjc.in