Institutional Investors – Driving Force for Good Governance
Confederation of Indian Industry jointly with Institutional Investors Advisory Service, under the aegis of National Foundation of Corporate Governance (NFCG) undertook a survey on ‘Institutional Investors: Driving Force for Good Governance’, amongst diverse groups of institutional investors to ascertain their level of engagement in affairs of investee companies and the challenges they face in the process.
The Survey has brought out the perspective of Institutional Investors on the dimensions of corporate governance they wish to instill in investee companies and how these investors can be an effective agent for improved corporate governance and value creation, instead of being providers of capital only.
The Survey outlines how institutional investors can be the value providers to business and economy apart from being the investors of capital. It reveals that majority of investors deem corporate governance as “very important” in their assessment of target companies. It also reflects on the investor perceptions on the effectiveness of corporate governance mechanism in India.
The Survey report covers two distinct parts comprising (i) Institutional Investors’ perception of corporate governance in Indian companies; and (ii) Involvement of institutional investors in corporate governance of investee companies. The respondents comprising 57% domestic and the 43% foreign investors, includes mutual funds, insurance companies, hedge funds, private equity funds and pension funds.
Respondents across the investors’ sphere concluded that institutional investors can play a crucial role in promoting better governance in Indian companies. 84.2% of the 54 respondents stated that corporate governance is ‘very important’ in deciding whether or not to invest in a target company. With a rating of 3.84 out of 4, the quality of financial reporting emerged as the most important parameter for investors evaluating prospective investments. This was followed by the reputation of the promoter, and then the reputation of the company’s management and finally the reputation of the board of directors.
Around 94.7% of the respondents associated good corporate governance with high shareholder returns. Interestingly, only 26% of the respondents have actually invested in a company purely because of its high corporate governance standards.
The survey results point to the fact that good corporate governance may be necessary but not sufficient to generate high returns. Other factors like the calibre of management, competitive position of the company also bear a stronger causal relationship with high shareholder returns.
Classifying companies in the Indian equity markets based on their controlling shareholder, the survey divided them into PSUs, MNC, Promoter-managed companies and Professional companies. The survey observed that among these four types of companies, MNCs are perceived to have the highest corporate governance standards with an average rating of 3.67 out of 4. Professional companies are also perceived as generating the highest shareholder returns - they received an average rating of 3.73 out of 4. Understandably then, investors also responded that they are most likely to invest in professional companies, followed by MNCs, family managed businesses and PSUs.
Elaborating the voting behavior of investors, 72% of the respondents said they are willing to invest in non-voting shares. This suggests in-principle indifference between passive and active investing. Among those who responded to this question, 60% of the respondents stated that they exercise voting rights for more than 75% of their portfolio companies, while 33.3% of respondents said they exercise voting rights for less than 50% of their portfolio companies. About 60% of the investors have an internal team in their company to help finalize their voting decision.
The survey found that related party transactions was the most contentious area for institutional investors. This was followed by mergers and acquisitions, dilution of equity and change in business lines. Intra-group mergers were the most frequently opposed corporate action, followed by intra-group loans and issue of preferential warrants to a selected class of shareholders.
The Survey also shed light on the vital issue of engagement with investee companies. For companies where their investments were above a self-reported minimum threshold, 25% of the investors met with the senior management of their investees once every month; while 44% of the investors met with the senior management of their investees once every quarter. When faced with a company proposal they disagree with, about 64% of the investors try to engage with the company and reach a consensus. 29% of investors responded that they exit the company, without engaging with the management. However, it was found that when institutional investors do make an attempt to improve corporate governance at their investee companies, they have met favorable response 80% of the time.
CII believes that the findings of the survey are vital and would form the base for future deliberations on the way forward for constructive institutional investor activism in India. This would strengthen governance and overall value creation. Well-governed companies play a strong role in winning retail investors’ confidence in the market and help channelize much needed domestic savings to the capital market which is critical to meet India’s inclusive growth aspirations.
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