Corporate Governance vital to decide investment : CII-IIAS Institutional Investors Survey
Corporate Governance vital to decide investment : CII-IIAS Institutional Investors Survey
18 September 2012, Mumbai: Does governance matter to investors? If it does, how do they think about it? Do they interact with companies regarding governance issues? A survey titled ‘Institutional Investors: Driving Force for Good Governance’ has been conducted CII in partnership with the Institutional Investor Advisory Services (IIAS), asks these and other questions to a diverse groups of institutional investors to understand their attitudes towards corporate governance.

The CII-IIAS Institutional was released by Dr Veerappa Moily, Minister for Corporate Affairs and Power at CII’s 8th International Corporate Governance Summit, today at Mumbai.

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 balance foreign investors, includes mutual funds, insurance companies, hedge funds, private equity funds and pension funds.

With responses across the investors’ sphere, the survey found that institutional investors can play a crucial role in promoting better governance in Indian companies. 84.2% of the 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.

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.

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 behaviour 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 favourable response 80% of the time.

The findings of the survey are vital and will form the base for future deliberations on the way forward for constructive institutional investor activism in India. This will 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.

To read the full report click here.