Tata Motors shareholders reject proposals executive pay

Mumbai: Minority shareholders of Tata Motors Ltd rejected a proposal for the payment of remuneration to its former managing director, Karl Slym, who died in January, and two other executives in excess of permissible limits, marking the first instance when shareholders have successfully stalled payment of excessive compensation to top executives in a company as large as the Tata group firm.

India’s largest auto maker failed to get 75% of the minority shareholder votes that is required for such a proposal to be approved, Tata Motors said on Wednesday. Companies that seek to pay a whole-time director more than 5% of a company’s net profit are required by law to seek minority shareholders’ approval. Tata Motors, which recorded losses in the past two quarters, said it had to take stockholder sanction because of “inadequacy of profits”.

The unprecedented action by Tata Motors’ shareholders may signal the beginning of a new era where stockholders challenge unreasonable proposals, including excessive pay to founders and top executives of companies that have reported losses or have underperformed.

“It’s not very often that the shareholders reject such proposals,” said Shriram Subramanian, founder of the independent proxy advisory and corporate governance firm InGovern. “It also shows that, unlike yesteryear, even large companies such as Tata Motors can no longer take the proposals put forth for shareholders’ approval for granted. Be it related to appointment of an independent director or remuneration.”

Along with Slym’s remuneration proposal, resolutions on packages for Ravindra Pisharody, executive director of the company’s commercial vehicle businesses, and Satish Borwankar, executive director (quality), also failed to get shareholders’ nod. Slym, Pisharody and Borwankar’s salaries will remain unchanged.

In an emailed response, a Tata Motors spokesperson said the structure of the remuneration proposals outlined in the three special resolutions was established, fully communicated and approved during fiscal year 2012-13.

“These proposals are consistent with market benchmarks and based on a series of metrics relating to the company’s overall performance and health, and aggressive implementation of strategies for future growth, said the spokesperson, adding that the “inadequacy of profits” at the company comes in a situation of unprecedented and prolonged economic slowdown in the national economy.

Tata Motors had also sought shareholders’ approval for an increase in the borrowing limit and raising funds through non-convertible debentures on a private placement basis, which were approved.

Tata’s move was in line with the Companies Act, which requires all money-losing companies to take public shareholders’ approval with a three-fourth majority before fixing remuneration of top executives and board members.

“It’s only fair of the shareholders to not approve given the state of company’s domestic performance”, said a senior analyst at a brokerage who declined to be identified. He, however, said it may demoralize employees and might lead to more people leaving the company. To some extent, it might also undermine the efforts to look for a new managing director for the firm.

Tata Motors’s domestic operations reported a ₹ 816 crore loss during in the quarter that ended in March.

The battle over remuneration is likely to gather steam in the coming days as all publicly traded firms, irrespective of their profits or losses, will be required by the new rules of the Securities and Exchange Board of India (Sebi) to take shareholders’ approval for fixing compensation packages of their top executives. The capital market regulator in February overhauled corporate governance norms for listed companies in an effort to improve transparency in their transactions and give minority shareholders a bigger say in management decisions. The new rules will take effect from 1 October.

The new norms, which are based on recommendations made by a committee headed by industrialist Adi Godrej in September 2012, will require companies to conduct a performance evaluation of all directors, including independent directors, on their boards.

Even before the new norms come into effect, shareholder activists have started witnessing a change.

“Typically shareholders have engaged with a company on issues like M&A (mergers and acquisitions) and other strategic decisions. However, operational decision like compensation were sidestepped. But in our conversations with stakeholders, we are now seeing a greater number of queries and far more discussion about issues like management compensation,” said Amit Tandon, chief executive at Institutional Investor Advisory Services India Ltd, a proxy advisory firm, in which Tata Investment Corp. Ltd is a stakeholder.

According to Mint research, top paid executives included Sun TV Network Ltd’s chairman Kalanithi Maran and his wife Kavery Kalanithi, an executive director of the company, who drew an annual remuneration of ₹ 56.25 crore each in fiscal 2013. Jindal Steel and Power Ltd chairman Naveen Jindal was paid ₹ 54.98 crore, while Hero MotoCorp Ltd managing director and chief executive officer (CEO) Pawan Munjal received ₹ 32.8 crore.

A stock exchange note showed that about 64% of Tata Motors’ public shareholders in the institutional category voted against the company’s remuneration proposal. About 30% of the public shareholders in other categories, too, voted against the proposal.

Tata Motors’ public shareholders in the institutional category include state-run insurer Life Insurance Corporation of India (LIC) with a 3.94% stake, Europacific Growth Fund with 2.51% and the government of Singapore with 1.25%.

“While voting on remuneration proposals, it is essential to assess the performance of the company and the trend the company has followed while fixing the remuneration. If the salary is revised exponentially upward, it is natural to vote against the proposal,” said a top LIC official on condition of anonymity.

Last month, in a note to Tata Motors’ shareholders, Stakeholders Empowerment Services (SES), another proxy advisory firm, recommended that they vote against some of the proposals. “The company should seek to claw back bonuses and commissions, which is based on company’s performance, from directors as a good corporate governance practice rather than seeking blanket approval for ratification of excess remuneration.”

Boston-based international proxy advisory firm Institutional Shareholder Services Inc. (ISS), on 27 June, also recommended that shareholders vote against resolutions on remuneration in the wake of losses incurred by Tata Motors.

“If approved, Pisharody and Borwankar will be entitled to receive the proposed minimum remuneration for the next three years, which exceeds the remuneration cap in the event of loss or inadequate profits stipulated under the relevant regulations. In addition, the company will not recover the excess remuneration paid to Pisharody, Borwankar, and Slym for the fiscal year 2014,” said the ISS report. ISS said the total managerial remuneration paid to these executives exceeded the prescribed limits under Old Act by up to an aggregate amount of ₹ 20.3 crore.

“Executive compensation should be linked to the company’s performance. The approval of these requests could reduce the accountability of the executives, as they will be paid more than the prescribed remuneration despite the company’s poor performance,” said ISS.

On Thursday, Tata Motors shares rose 3.03% to ₹ 468.80 on BSE, while the benchmark Sensex closed at 25,823.75 points, down 0.07%.

Ashish K. Mishra contributed to this story.