The role of proxy advisory firms in corporate governance has grown significantly, influencing shareholder voting and corporate decision-making. These firms, including ISS and Glass Lewis, provide important advice on governance issues such as board elections and executive compensation, affecting a significant portion of shareholder votes and influencing corporate strategies. Despite their influential role, proxy advisory firms often operate without formal regulatory oversight, raising concerns about quasi-regulatory powers and a lack of accountability.

In India, the Securities and Exchange Board of India (SEBI) has introduced regulations governing proxy advisory activities, but significant gaps remain. The 2014 and 2019 regulations made progress in defining the role of trust advisors, including registration and disclosure requirements. However, these provisions fall short in several areas, such as providing detailed guidance on the qualifications of trusted advisors, imposing sanctions for unethical practices and providing comprehensive client protection. A special statutory body is also needed to oversee proxy firms and ensure that ethical standards are met.

Proxy firms internationally face similar challenges. The significant market influence of firms such as ISS and Glass Lewis necessitates the development of harmonized regulatory standards. Possible solutions include the establishment of an international regulatory framework, strengthening transparency and disclosure requirements, and introducing conflict of interest regulations. In addition, promoting fiduciary duties and stakeholder engagement can help ensure that proxy advisory services remain impartial and focused on the best interests of their clients. In conclusion, addressing the challenges facing proxy advisory firms requires a holistic approach both in India and globally. By strengthening the regulatory framework, increasing transparency and ensuring compliance with ethical standards, we can improve the effectiveness of our proxy advisory services and promote more balanced and responsible corporate governance practices.

Introduction
Corporate governance is designed to promote effective, innovative, and prudent leadership, ensuring sustainable success by improving a company's reputation, operational effectiveness, and social responsibility. It includes core elements such as accountability, openness, independence, integrity, equity, environmental stewardship, ethical behavior, and engagement with stakeholders. In simple terms Corporate governance refers to the systems and rules that guide how a company is directed and controlled.

It involves setting goals for the company and making sure those goals are pursued in a way that respects the laws, market conditions, and societal expectations. For a better instinct, think of corporate governance like the rules of a game. Just as a game has rules to ensure fairness and that everyone knows how to play, corporate governance provides a framework to ensure that a company is managed properly. This includes setting clear objectives for what the company wants to achieve and making sure it operates in a transparent and ethical manner.

The goal of corporate governance is to help the company meet its objectives while building trust with everyone involved, such as investors, employees, customers, and the community. By following good governance practices, a company can show that it is reliable and trustworthy, which helps maintain confidence among its stakeholders.

Additionally, it emphasizes the importance of strong board practices to steer decision-making and strategic planning. By upholding these principles, corporate governance aims to harmonize stakeholder interests, protect the company's assets, and support long-term viability.

Evolution Of Proxy Advisory
Proxy advisory firms play a role in voting on behalf of institutional investors by using their recommendations. The term 'proxy advisory' is based on the concept of 'proxy votes' where shareholders delegate their voting rights to another party (such as a proxy advisory firm) to cast votes on their behalf regarding resolutions proposed by management. These resolutions often cover matters such as electing board members, approving equity compensation plans, reviewing management compensation, and other governance-related issues such as board structure and compensation policies1.

The evolution of the Proxy Advisory came in India after the Satyam Scam in 20092. To address the issues exposed by this scandal, the Indian market regulator, SEBI, introduced new rules in July 2010 through a regulation called the "Securities and Exchange Board of India (Mutual Funds) (Amendment) Regulations, 20103." These rules aimed to make the way mutual funds vote on shareholder issues more transparent and to require them to clearly explain how they decide their voting choices.

As the investors started paying more attention to how companies are run and became more active in their shareholder roles, there was a growing need for services to help manage and advise on these votes. This led to the creation of the proxy advisory industry in India. Essentially, proxy advisory firms were set up to help investors by providing guidance on how to vote on important issues related to the companies they invest in. Proxy Advisory is defined under Section 2(p) of SEBI (Research Analytic) Regulation, 20144, which means "proxy adviser" is someone who gives advice to big investors or company shareholders about how to use their rights in the company. This includes suggesting how to vote on company matters or how to handle public offers.

The important terminologies in reference to the proxy advisory are "Proxy Season" This is generally a three-month spring period for investors that generally starts in April and ends in June. This is a period when a proxy adviser provides consulting to a company or individual for making business decisions5. "Universal Proxy Card" a universal proxy card, simplifies the voting process for shareholders by letting them choose from all available options on a single form, making it easier to vote for the best candidates and proposals6. Proxy Statement is a type of document that is presented to the shareholder before any annual or special meeting7. Proxy advisory firms are independent companies that help investors by providing advice and research on how to vote on various company issues.

Their recommendations cover important areas like choosing board members, approving employee compensation plans, and other key decisions about how a company is run. These firms act as expert consultants who analyze company proposals and suggest whether investors should vote "yes" or "no" on them. They emerged because shareholders wanted more guidance and transparency in response to poor corporate governance.

Essentially, proxy advisory firms support shareholders by offering advice, and if shareholders give them permission, these firms can even cast votes on their behalf, which was not seen in the practice8. As the global investment landscape has expanded, it has become increasingly difficult for shareholders, especially international investors, to attend meetings and vote in person. This process can be both costly and complex for companies to manage.

To overcome these challenges, the concept of proxy voting was developed. Shareholders appoint another person that is a proxy person to vote on their behalf. This system streamlines the voting process, enabling shareholders to delegate their voting rights to a representative. The appointed proxy then casts the vote according to the shareholder's instructions, making participation in corporate decisions more accessible and less burdensome.

The rise of proxy advisory firms has played a significant role in this evolution. These independent companies offer expert analysis and recommendations on various corporate governance matters, such as electing board members and approving executive compensation plans. They have become crucial due to the increased demand for transparency and informed decision-making in shareholder voting. Proxy advisory firms help investors by providing well-researched advice, and in some cases, they may even be authorized to vote on behalf of shareholders. This development in proxy voting and the growing influence of proxy advisory firms reflect a shift towards more efficient and inclusive corporate governance practices, accommodating the needs of a diverse and global investor base.

Current Regulatory System Of Proxy Advisory In India
In India, "The Security Exchange Board Of India (SEBI)9" is a statutory body that deals with the issuance of the regulation of Proxy Advisory. Nevertheless, Section 11 of the SEBI Act 1992 & Section 11A10, in a broader term, give the board the power to frame rules for matters related to the proxy advisory. There are many regulations provided by SEBI regarding the proxy advisor.

Following are the few regulations issued by SEBI
SEBI 2014 Regulation11
This was the first regulation to define the Proxy Advisory and also provide certain guidelines in relation to proxy advice, such as:

1. Mandatory Registration: Proxy advisory firms are obligated to register with SEBI (Securities and Exchange Board of India) and after reviewing all the essential requirements, the board shall grant a certificate of registration as mentioned in the regulation 12.
2. Recommendation Disclosure: They must openly disclose all recommendations they issue 13.
3. Internal Oversight: A structured system must be put in place to oversee the firm's internal operations and ensure proper discipline 14.
4. Record Maintenance: Detailed records of all recommendations provided must be kept 15.
5. Code of Conduct: Schedule 3 of the Regulation provides a list of conduct guidelines, including principles such as integrity, transparency, and confidentiality, that must be adhered to 16.

Observation
Moreover, the specific section of the SEBI Act as mentioned above does not expressly mention the term 'proxy advisor' but somehow indirectly reflects the power of SEBI to form any such rule that shall be competent and promote the fair working of the institute in reference to the Indian market.

Recommendation of SEBI somehow, according to my opinion, is not justified because of the following reasons:
A Proxy Advisory is a consultation-based company. The job of the company is to advise their clients, and a wall needs to be drawn about what their tools made them come to such a conclusion. If a company starts disclosing its data on what presumption made them draw such advice, it reflects a question of doubt about their expertise. It can happen that the client is satisfied with the advice but not satisfied with the data presented. The client may reject the idea of the proxy advisor, which in this case is a loss for such companies.

If the proxy advisory follows the guidelines for disclosure, there shall be a limitation imposed by the SEBI What shall be the limitation of such disclosure? For instance, if the proxy advisory fully discloses the data, then it has to also disclose the mediator name who provided them such information, which may cause a problem for such a mediator in the future. In the regulation, no such penalty was mentioned for proxy advisors in case of any such infringement or loss that is caused to the companies on the basis of such advice. No expressly mention guidelines for the proxy advisor taking advice from insight of the organization and what shall be the method of dealing if found doing so.

There is no limitation on the number of shareholders a proxy advisor can advise in the same organization. For instance, in a company where there are many shareholders, if the same proxy advisor provides advisory to the majority shareholder it will result in the poppet show of the shareholder hosting by such proxy advisor.

In 2019, a new guideline came up by SEBI which set up procedures and guidelines for proxy advisory. After the 2014 regulation, the rules and duties of a proxy advisor were provided But in the year 2019, procedure guidelines were issued with respect to the proxy advisor.

SEBI 2019 Regulation17

1. Policy Disclosure: Proxy advisors must disclose their voting recommendation policies pertaining to Indian-listed companies and review them annually¹⁸.
2. Simultaneous Reporting: The report must be shared at the same time with both the company and the investors, giving both parties the chance to review the suggestion¹⁹.
3. Company Feedback: Companies can submit clarifications or comments within a predetermined time frame for possible amendments to the report; this will result in getting advice from proxies from the company for their betterment²⁰.
4. Major Discrepancies: If a company's opinion differs from the proxy advisor's report and cannot be resolved with minor changes, additional reports or addenda may be issued²¹.
5. Error Disclosure: Any discrepancies, false information, or significant revisions must be disclosed to clients within 24 hours of identifying the issue²².

Observation
In my opinion, in the last five years SEBI has been just focusing on a specific area only which they have been dealing with in the previous report. Below are a few observations. No specific statutory body was formulated by SEBI which deals with problems and solutions of the proxy advisory. No specific statutory act is provided that shall be the guiding principle and regulating principle for the proxy advisor. Still, no penalty has been introduced for the unethical practices of proxy advisory No safety measure for the client to not disclose the information was granted. Not specifying the limitation of the disclosure of information by the proxy advisory firms for their client.

Some Of The Well Known Proxy Advisory Companies

1. Institutional Investor Advisory Service India Limited (IIAS)
   IIAS is one of the Indian reputed companies in the field of Proxy Advisory. It was established in 2010, covering 1000+ companies, 13000+ shareholder meetings, and 71000+ voting recommendations. IIAS serves a diverse array of institutional investors, including mutual funds, pension funds, and insurance companies. The firm is well-regarded for its extensive research and detailed voting recommendations.
2. Proxy Advisory Services India Private Limited (PAS)
   PAS is a company incorporated in 2010. PAS provides advisory services to a broad spectrum of institutional clients. The firm focuses on corporate governance issues, shareholder activism, and voting guidance, catering to various asset managers and financial institutions.
3. Stakeholder Empowerment Services (SES)
   SES is a company incorporated in 2012. It is a not-for-profit proxy advisory company. This is the first company to be incorporated within the ambit of SEBI Regulation 2014. SES specializes in proxy advisory and corporate governance services, supporting institutional investors such as asset managers and pension funds with comprehensive research and voting advice.
4. InGovern Research Services
   InGovern Research Services is a corporate company incorporated in June 2010. It was the first proxy company in India. InGovern offers proxy advisory and corporate governance research to institutional investors, including mutual funds, insurance companies, and private equity firms. Their services are designed to assist clients in making informed voting decisions.
5. ESG India Advisory
   Founded: September 2015
   ESG India Advisory focuses on environmental, social, and governance (ESG) aspects of investment. They serve institutional clients who are interested in sustainable and responsible investment practices.

Loophole of Proxy Advisory in 2023: Need for Regulation

In the modern era, both companies and proxy advisory firms face challenges in protecting themselves from each other. A simple solution is to establish a different board to monitor and regulate their relationship. This board should grant certificates to those eligible to become proxy advisors. Additionally, a statutory act is needed to govern the relationship between proxy advisor firms and their clients:

1. In India, there is no statutory act that expressly regulates proxy advisors. It's only SEBI's regulation that provides rules from time to time for proxy advisory.
2. In some cases, proxy advisors themselves became shareholders in organizations where they advise clients. A specific act could limit such participation, making them liable for unfair trade practices if violated.
3. Proxy advisors advise directors, but SEBI does not specify the qualifications or specializations required for proxy advisors. A statutory act could establish such criteria.
4. SEBI should periodically provide better training to proxy advisors, which is lacking in India.
5. Shareholders should receive training to make informed decisions during voting, as they are essential in the company's decision-making.
6. Clients of proxy advisors should demand full disclosure of the business models employed by advisors, including employee details, the scope of work conducted abroad, and staff training.
7. When proxy advisors are involved in takeover scenarios, they should be regulated similarly to financial advisors and investment bankers. Any advice given should disclose if the proxy advisor served as a consultant for any parties involved in the past two years.
8. Proxy companies are largely unregulated, with no requirements for reporting or transparency, making accountability difficult.
9. Non-clients cannot access reports and recommendations from proxy advisors. There's a need for transparency in how recommendations are made and how advisors are compensated.

Command of Proxy Advisory Firms Internationally

1. As per Harvard's report in 2020, 114 institutional investors cast votes in strict alignment with either ISS or Glass Lewis. 86% followed ISS's recommendations, while 14% adhered to Glass Lewis, highlighting ISS's market dominance.
2. Proxy advisory firms are experiencing a decline in influence, with ISS advising on 48% and Glass Lewis on 42% of their respective portfolios. The growing dominance of these firms has led to discussions on their role in financial markets.
3. The SEC has observed that the concentration of influence held by advisory firms has allowed them to play quasi-regulatory roles despite lacking statutory authority. This growing dominance has raised concerns about their role in corporate governance decisions.

Conclusion
The increasing influence of proxy advisory firms in both India and globally highlights a pressing need for comprehensive regulatory reforms to address their growing power and ensure transparent, fair practices in corporate governance. While proxy advisory firms like ISS and Glass Lewis play a crucial role in guiding shareholder voting and corporate decisions, their quasi-regulatory position without formal statutory oversight raises significant concerns about accountability and fairness.

Solution For India
In India, the regulatory framework for proxy advisory firms has seen important developments with SEBI's regulations in 2014 and updates in 2019. However, there are notable gaps that need to be addressed to strengthen the regulatory environment:

1. Establish a dedicated regulatory authority: India should establish a dedicated statutory body with clear authority to regulate proxy advisory firms. This body would oversee the registration, qualification, and operational standards of proxy advisors, ensuring compliance with ethical and professional standards.
2. Define qualifications and ethical standards: Specific qualifications and ethical guidelines should be mandated for proxy advisors. This includes criteria for expertise, experience, and impartiality to ensure that advisors provide credible and unbiased recommendations.
3. Enhanced disclosure requirement: Proxy advisory firms should be required to disclose detailed methodologies used in their recommendations, potential conflicts of interest, and information about their advisors. This will increase transparency and allow clients to make more informed decisions.
4. Implement penalties for non-compliance: Establish clear penalties for unethical practices or violations of regulations by proxy advisory firms. This could include fines, suspension, or revocation of registration to enforce adherence to standards and protect the integrity of proxy advisory services.
5. Improve training and education: Regular training and professional development programs for proxy advisors should be introduced to ensure they stay updated on best practices and regulatory changes. Additionally, shareholders should receive training on their voting rights and responsibilities to make informed decisions.

Solution for international context

Globally, the role of proxy advisory firms has become increasingly prominent, and several solutions can be adopted to address the challenges posed by their influence:

1. Develop international regulatory standards: International cooperation is crucial to create harmonized regulatory standards for proxy advisory firms. Global bodies such as the International Organization of Securities Commissions (IOSCO) could develop guidelines to ensure consistent regulatory practices across jurisdictions.
2. Implement conflict of interest regulation: Proxy advisory firms should be required to disclose any conflicts of interest and ensure that their recommendations are free from undue influence. Regulations should be in place to prevent firms from holding significant stakes in the companies they advise.
3. Enhance transparency and reporting: Proxy advisory firms should be mandated to provide transparent reporting on their advisory processes, including how they develop recommendations and their criteria for evaluating corporate issues. This transparency will help stakeholders understand the basis of recommendations and assess their reliability.
4. Establish clear fiduciary duties: Proxy advisory firms should be subject to fiduciary duties, ensuring that they act in the best interests of their clients. This includes providing unbiased recommendations and avoiding actions that could benefit the firm at the expense of its clients.
5. Promote stakeholder engagement: Encourage broader engagement between proxy advisory firms, companies, and other stakeholders to foster a more balanced approach to governance. Regular dialogue can help address concerns and improve the effectiveness of proxy advisory services.

In conclusion, addressing the challenges posed by proxy advisory firms requires a multifaceted approach that includes establishing robust regulatory frameworks, enhancing transparency, and promoting ethical practices both in India and internationally. By implementing these solutions, we can ensure that proxy advisory services contribute positively to corporate governance, maintain investor confidence, and support the overall health of financial markets.

End Notes:

1. By Shanmugasundaram, Subramanian, Topic: Proxy advisory industry in India. Research Gate, (Jan 2016) https://www.researchgate.net/publication/311621462_Proxy_advisory_industry_in_India
2. By Madan Lal Bhasin, Topic: Revisiting the Satyam Accounting Scam: A Case Study, ResearchGate, (Jun 6, 2016) https://www.srcc.edu/sites/default/files/Satyam%20scam%20of%20corporate%20governance.pdf
3. Securities and Exchange Board of India (Mutual Funds) (Amendment) Regulations, 2010, SEBI, https://www.sebi.gov.in/legal/regulations/jul-2010/securities-and-exchange-board-of-india-mutual-funds-amendment-regulations-2010_716.html
4. SEBI (Research Analytic) Regulation, 2014, SEBI, Section 2(p), https://www.sebi.gov.in/sebi_data/commondocs/RESEARCHANALYSTS-regulations_p.pdf
5. By Kezia Farnham, Topic: Proxy season explained: What it is & how to prepare, Diligent, (Oct 11, 2023) https://www.diligent.com/resources/blog/proxy-season
6. By Jessica Donohue, Topic: The new universal proxy card: How boards can adapt, Diligent, (Aug 23, 2023) https://www.diligent.com/resources/blog/universal-proxy
7. By Kezia Farnham, Topic: What is a proxy statement? Definition, rules, & examples, Diligent (Jul 24, 2023) https://www.diligent.com/resources/blog/what-is-a-proxy-statement
8. By Srivastava, Usha, Topic: PROXY ADVISORY INDUSTRY-CHANGING FACE OF SHAREHOLDER & CORPORATE GOVERNANCE, ResearchGate, (April 2024) https://www.researchgate.net/publication/379483477_PROXY_ADVISORY_INDUSTRY-CHANGING_FACE_OF_SHAREHOLDER_CORPORATE_GOVERNANCE
9. Securities and Exchange Board of India Act, 1992, 15 of 1992, 1, India, https://www.sebi.gov.in/sebi_data/attachdocs/1456380272563.pdf
10. Securities and Exchange Board of India Act, 1992, 15 of 1992, 11 & 11A, India, https://www.sebi.gov.in/sebi_data/attachdocs/1456380272563.pdf
11. SEBI 2014 Regulation, 2014, SEBI, https://www.sebi.gov.in/legal/regulations/aug-2024/securities-and-exchange-board-of-india-research-analysts-regulations-2014-last-amended-on-august-21-2024-_86059.html
12. SEBI 2014 Regulation, 2014, SEBI, Regulation 9, https://www.sebi.gov.in/legal/regulations/aug-2024/securities-and-exchange-board-of-india-research-analysts-regulations-2014-last-amended-on-august-21-2024-_86059.html
13. SEBI 2014 Regulation, 2014, SEBI, Regulation 23, https://www.sebi.gov.in/legal/regulations/aug-2024/securities-and-exchange-board-of-india-research-analysts-regulations-2014-last-amended-on-august-21-2024-_86059.html
14. SEBI 2014 Regulation, 2014, SEBI, Regulation 15, https://www.sebi.gov.in/legal/regulations/aug-2024/securities-and-exchange-board-of-india-research-analysts-regulations-2014-last-amended-on-august-21-2024-_86059.html
15. SEBI 2014 Regulation, 2014, SEBI, Regulation 23(3), https://www.sebi.gov.in/legal/regulations/aug-2024/securities-and-exchange-board-of-india-research-analysts-regulations-2014-last-amended-on-august-21-2024-_86059.html
16. SEBI 2014 Regulation, 2014, SEBI, Schedule 3, https://www.sebi.gov.in/legal/regulations/aug-2024/securities-and-exchange-board-of-india-research-analysts-regulations-2014-last-amended-on-august-21-2024-_86059.html
17. SEBI 2019 Regulation, 2019, SEBI, https://www.sebi.gov.in/reports/reports/jul-2019/report-of-working-group-on-issues-concerning-proxy-advisors-seeking-public-comments_43710.html
18. SEBI 2019 Regulation, 2019, SEBI, Regulation 81, https://www.sebi.gov.in/reports/reports/jul-2019/report-of-working-group-on-issues-concerning-proxy-advisors-seeking-public-comments_43710.html
19. SEBI 2019 Regulation, 2019, SEBI, Regulation 58, https://www.sebi.gov.in/reports/reports/jul-2019/report-of-working-group-on-issues-concerning-proxy-advisors-seeking-public-comments_43710.html
20. SEBI 2019 Regulation, 2019, SEBI, Regulation 60, https://www.sebi.gov.in/reports/reports/jul-2019/report-of-working-group-on-issues-concerning-proxy-advisors-seeking-public-comments_43710.html
21. SEBI 2019 Regulation, 2019, SEBI, Regulation 9(c), https://www.sebi.gov.in/reports/reports/jul-2019/report-of-working-group-on-issues-concerning-proxy-advisors-seeking-public-comments_43710.html
22. By IIAS, Topic: IIAS, 2010, https://www.iiasadvisory.com/
23. By SES, Topic: SES, 2012, https://www.sesgovernance.com/
24. By SES, Topic: SES, (Nov 15, 2018) https://www.sec.gov/comments/4-725/4725-4649246-176493.pdf
25. InGovernance, InGovernance 2010, https://www.ingovern.com/
26. By Shanmugasundaram, Subramanian, Topic: Proxy advisory industry in India. Corporate Ownership and Control, (Jan 2016) https://www.researchgate.net/publication/311621462_Proxy_advisory_industry_in_India
27. By Professor Yvan Allaire, Topic: The Troubling Case of Proxy Advisors: Some policy recommendations, (Jan 2013), https://www.sec.gov/comments/4-725/4725-4549663-176173.pdf
28. By Paul Rose, Topic: Proxy Advisors And Market Power: A Review of Institutional Investor Robovoting, Harvard Law School Forum On Corporate Governance, (Sep 8, 2024) https://corpgov.law.harvard.edu/2021/05/27/proxy-advisors-and-market-power-a-review-of-institutional-investor-robovoting/