Investors resisting board appointments, reappointments at public sector enterprises

Investors are beginning to push back on board appointments and reappointments at public sector enterprises (PSEs). In the 2020 voting season, 26.6% of the 188 resolutions for director reappointment proposed by a group of 45 PSEs had more than 20% institutional investors voting against. Of this, 3.2% of the resolutions had between 40% and 50% investors voting against while 4.3% more than 50% against.

Of the 45 PSEs (excluding government-owned banks) for which IiAS sent out voting recommendations this year, 30 companies or two-thirds of the pool were not compliant with the Regulation 17(1) of the Sebi Listing Obligations and Disclosure Requirements (LODR). Five of these 30 companies did not have even one independent director.

Performance on the diversity agenda is equally poor. About 45% or 20 companies do not have an independent woman director, two years after Sebi made it mandatory in April 2019. Given PSEs appoint an executive chairperson, 50% of the board should comprise independent directors under Regulation 17(1) of the Sebi LODR.

Since the government is often the majority shareholder and enjoys extraordinary control powers over listed PSEs, the investors’ ability to effect change is limited. In this context, IiAS believes regulators need to step in and enforce compliance for board composition norms at PSE. That would improve governance leading to better valuations and helping the disinvestment goals.

IiAS notes that though there may be a number of reasons for PSEs underperforming in the market, the apathy shown by the administrative ministry in appointing directors is an important factor, leading to sizable underperformance in the market.

The net result is a loss for the exchequer. Providing autonomy on board appointments may help the companies not only to comply with the regulatory requirements but also mark the first step in decentralising the decision-making process. This can help the companies accelerate on the government’s strategy to improve efficiency or divest a particular PSE.