Redington in a spot over CEO

Investors and proxy advisory firms argue against the company's interpretation of rules preventing independent directors from taking up executive roles within a year.
Investors and proxy advisory firms argue against the company's interpretation of rules preventing independent directors from taking up executive roles within a year.

Summary

  • Proxy advisors, investors object after independent director named CEO; company says the Sebi rule doesn’t apply

New Delhi/Bengaluru: Redington India Ltd’s decision to name a former independent director as CEO has irked several investors and proxy advisory firms, who disagree with the company’s interpretation of rules limiting independent directors taking up executive roles within a year.

On 11 September, Redington, Apple Inc.’s largest distributor in India, appointed V.S. Hariharan as group CEO, after former managing director Rajiv Srivastava resigned on 11 August, citing personal reasons and without serving any notice period. Hariharan stepped down as chair of the board’s nomination and remuneration committee on 23 August, quit as independent director on 1 September, and joined as CEO 10 days later.

The Securities and Exchange Board of India dictates that an independent director at a public company cannot take up an executive role or a director position in the same company or its subsidiaries within a year. Redington has defended the move, saying that Hariharan is group CEO and not on the board; hence the cooling-off rule does not apply.

“The company has appointed him (Hariharan) as manager to fill up the casual vacancy caused due to resignation of managing director. The company has found a very unique way to by-pass Sebi LODR by appointing him as manager and not managing director," proxy advisory firm Stakeholders Empowerment Services (SES) said in a note dated 17 November. “Though, company may be technically compliant with the law, however, as per SES the same is not in spirit of the law."

“We raise further concern that the group CFO, who has a board membership, will likely report to V.S. Hariharan, who does not – this makes for an incongruous reporting relationship," said Institutional Investor Advisory Services in a note dated 22 November. Both proxy firms have asked shareholders to reject Hariharan’s candidature, voting for which ends on 30 November.

An email sent to a Redington spokesperson seeking comments remained unanswered.

The development also highlights corporate governance at companies such as Redington lacking promoters, and are classified as professionally run firms with public shareholders as owners.

Significantly, this follows growing dissent among Redington’s institutional shareholders, the majority of who rejected three resolutions, even leading to one proposal getting defeated in July. It also raises questions on the leadership of Redington chair J. Ramachandran, a former professor of strategy at Indian Institute of Management - Bangalore.

“The idea is to make sure that companies don’t lure independent directors with promises of full-time positions in exchange for being pro-management in board meetings," said a Mumbai-based securities lawyer on condition of anonymity. “The exchanges or Sebi can initiate proceedings either suo moto or based on investor complaints in such cases. It is also important to plug the interpretational issue in the rules to ensure better clarity."

“This is a complete mockery and defeats the spirit of corporate governance," said an investor who owns less than 0.3% of Redington’s shares. “We along with many other investors have sought an explanation from the company," said the executive, who declined to share more details, as the discussions between investors and chairman are confidential.

Redington was founded in 1993 by R. Srinivasan to sell PCs and printers to resellers. It was listed on stock exchanges in 2007, and by September 2017, Srinivasan had sold his entire 44% promoter stake. Over the last three decades, it has built relationships with many marquee brands, including Apple, HP and Dell, and a strong warehouse and distribution network to sell gadgets.

Redington clocked 79,519 crore revenue (about $9 billion) in FY23. However, given the lack of pricing power, its operating margin came in at a meagre 2.6%. This underscores the low valuation: Redington had a market cap of 12,355 crore as of 23 November.

Apple accounted for 30% of Redington’s total business, followed by HP and Dell, which constituted 12% and 7%, respectively, according to an investor presentation dated 6 November.

Taiwan’s Synnex Corporation is the largest shareholder, owning 24.13% and has two directors on the seven-member board.

Nonetheless, some of the largest money managers, including Vanguard, the world’s second-largest asset manager managing over $7.5 trillion in assets under management, and which owns 1.02% of Redington, have rejected a few proposals in July, according to filings reviewed by Mint.

Two other large public institutions, including BlackRock Inc., the world’s biggest money manager, and which manages over $10 trillion in assets under management and Royal Bank of Canada, which manages assets over $500 billion, rejected three proposals about the company issuing restricted stock units to employees.

“The proposed option scheme does not have clear performance criteria for granting and/or vesting," reasoned BlackRock when it voted against the proposal.

pavan.burugula@livemint.com

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