The significance of AGM in Corporate Governance:

Corporate Governance:

According to Cadbury Committee (UK), the basic principle of corporate governance is to

separate ownership and management of companies and run them in the interest of owners
rather than the management. In a Public limited set up, a company pools capital from
thousands of shareholders who therefore become the owners of the company. They
effectively play no active role in the day to day running of the company and delegate all
the ‘governance’ to the management.

Most of the large corporate groups in India were born as family-owned businesses. The
family members used to occupy managerial positions and took all the key business
decisions. However, with the LPG reforms of 1991 and the evolution of equity markets,
many of these family-owned businesses listed themselves on the exchanges. Though no
longer the sole owners, the promoters continued to wield disproportionate influence over
decisions.

Companies Act 1956 tried to fix it by requiring company Boards to seek Central
Government permission for certain decisions like loans to directors and shareholder
approvals for decisions like appointment of relatives. In 2000, the SEBI came up with
Clause 49 of the Listing Agreement for all the listed companies that dealt with the issues
of corporate governance based on the recommendations of Kumaramangalam Birla
Committee. At present, the corporate governance norms in India are governed under three
heads: The Companies Act, Clause 49 in the listing agreement and SEBI’s new Listing
Obligations and Disclosure Requirement Regulations 2015.

AGMs:

The Companies Act 2013 regulates the requirement to conduct an Annual General
meeting of the members to discuss the four ordinary businesses. The four businesses
include 1) Financial statement approval 2) Appointment of Director 3) Appointment and
to fix the remuneration of statutory auditor 4) Declare the dividend. The AGM should be
held within 18 months of the date of company’s incorporation and, thereafter once a year.
The minutes of the AGM must be kept up to date and pasted in the companies' minute
book.

The AGM is the principal forum in which Directors account to shareholders for their
stewardship of the company. The AGM offers a stage for shareholders to ask questions,
debate and exercise their fundamental rights to vote on important resolutions. Thus the
AGMs are very important as it results in some form of a governance control over
companies and it is the only time when the company seeks shareholders approval and the
top management of the company is available for questions.

However, there is a growing feeling that the meeting, in its traditional form, is no longer
‘representative and effective’. In the wake of companies becoming more complex and
global, the relevance of AGMs is all the more important. The high profile scams like
the stock market scams (of Harshad Mehta, Ketan Parekh), UTI scam, Satyam scandal
and the recent ICICI bank and IL&FS controversy which have been termed as the
outcomes of failed corporate governance, there is a need to revive AGMs for more
stringent norms surrounding corporate governance to prevent their recurrence.

Investors must recognize that beyond the regulatory aspect, companies in general do not
have any overwhelming commercial incentive in conducting an AGM. The biggest
beneficiary from the AGM exercise is the minority shareholder. Under the Companies
Act 2013, companies are forced to seek votes from minority shareholders for approval on
implementing some of the management actions. For some related-party transactions
beyond a threshold, the company will now need to seek approval of a majority of the
minority vote.

Criticisms of AGM effectiveness generally fall into two categories, informational and
procedural. On the informational side, critics argue that the meetings yield little
information that is not already available to the market; the materials that are prepared for
the meeting, including the directors’ report, remuneration report, corporate governance
statement, auditor’s report and financial statements are complex and difficult to
understand; and that institutional shareholders gain more frequent and better quality
information than retail shareholders.

When it comes to procedure, critics say that since most shareholders, by number and by
percentage of holding, have already voted by proxy, the deliberations at the meeting have
no material bearing on the resolution of the outcomes. This has also resulted in falling at
falling attendance at AGMs. Research from Equiniti suggests that 76% of shareholders
interviewed think that companies should do more to encourage shareholder engagement.
Some of the measures can be:

1. Increasing attendance

With globalization, video conferencing and the Internet, it’s not surprising that few
people attend AGMs. SEBI has endorsed AGMs to be held simultaneously at multiple
venues, including virtual venues, to improve the convenience of attendance for
shareholders and to encourage greater shareholder participation and engagement. A
compulsory e-voting platform has been proposed in the Companies Act 2013.

While being more costly for companies, holding such hybrid – both virtual and physical
– meetings would give the option to shareholders to either attend in person or online. The
opportunity to confront the Board with difficult questions will be more possible as those
at the physical meeting will be able to put forward questions. The risk of censorship,
however, will still be possible with the online questions. A potential way to mitigate this
would be for shareholders to elect an impartial individual to manage the questions put
forward online to ensure that questions are not ignored. E-voting will mitigate the need
for physical completion of proxy forms.

However, managing cyber-security when it comes to virtual meetings is crucial. It is an

issue that requires vigilance, careful monitoring, and research. In addition, IT issues are
likely to present problems for virtual meetings.

2. Informational & procedural changes

Successful AGMs don’t have to be just massive crowd pullers. Trust and confidence in
the shareholders towards management action in the forthcoming year is the most critical
outcome from an AGM. Shareholders and companies, together, can make AGMs
productive.

After a company sends a notice for an AGM, it is important that shareholders, based on
the documents sent to them and other available information, take the time to understand
the company’s fundamentals and performance.

Shareholders should then make a list of questions for the company management and send
this list to the company in advance so that the questions are addressed by them in the
AGM. To win shareholders’ trust, the management, in turn, should appreciate
shareholder expectations on financial performance as well as corporate behaviour. AGMs
also need greater involvement of auditors to respond to financial questions.

There also needs to be improvements in the quality, relevance and succinctness of

information being provided to shareholder meetings by: convening a series of
information briefings, webcasts or podcasts leading up to the holding of a shareholders’
meeting; improved use of audio/visual technology including infographics and video
screening rather than traditional pre-typed reports read verbatim from the podium.

There needs to be improved skills and meeting management by the chair to enhance
meeting efficiency and effectiveness. More time should be being taken to explain the
company’s future direction and prospects, its strategy and risks, and the plans for
addressing such matters. There should be more information about the skills, experience
and attributes of the board members, especially those standing for election/re-election.

The presentations of information at the AGM should be disconnected from the voting on
the resolutions by 48 hours to allow opportunity for greater engagement, informed and
shared deliberations, and reflection by shareholders on the issues before the shareholders’
vote is taken.

At the same time all voting at general meetings, at least on substantive rather than minor
procedural motions, should be by way of formal poll rather than by show of hands so as
to deliver greater assurance of integrity in the voting outcome and declaration of the
result of meeting resolutions by the meeting chair.

Conclusion:

India is an emerging economy but the principles and best practices on corporate
governance mentioned in the Companies Act are among the best in the world. The
regulatory framework for increased disclosures, enhanced shareholder voting rights and
easier management interaction, may just have set the stage for considerably improving
the prospects of all stakeholders. It is important that shareholders and companies together
use the AGM forums to build a strong capital market environment.

Good Corporate Governance standards are essential to ensure significant value

enhancement to all the stakeholders of a company, including the minority shareholders,
the government and the economy. India has always stood at the top in protecting the
interests of minority shareholders (at 4th place in Ease of Doing Business Report 2018 by
World Bank) and this has been attributed to positive corporate governance norms that
have been put in place by the government and SEBI.