The role of institutional investors in corporate governance is shifting centre stage. The circular issued last March by Sebi, the country?s market regulator, asking asset managers to make public their voting policy and publish their voting record, is a clear pointer that institutional investors don?t just have the right, but have a duty to engage with companies in which they invest.

Clearly, this dialogue has to take a different form from that in the Anglo-American world. In American-English companies, management and ownership is cleaved. Consequently, the dialogue is between a company?s shareholders and its management is through its board. The board is expected to hire the ?right? CEO and senior management (Virginia Rometty, IBM), fire the wrong one (Carol Bartz, Yahoo!), ensure compensation is fair (Steve Ballmer at Microsoft only got half his potential bonus for 2010) and provide strategic direction to the company (H-P).

In contrast, in India this dialogue is expected to take place between two sets of shareholders. To the extent both sets are owners of the business, there is a clear convergence of interests. Despite this strategic alignment, both sets may not pull in the same direction. There will be times when there is a conflict of interest, as the interests of the ?controlling? shareholder differ from that of the institutional and small shareholder (collectively referred to as outsider shareholders). This can happen in the case of merging a unlisted company, owned by the ?promoters?, with a listed company in the ?group?, at an exchange ratio that is detrimental to outsider shareholders (Nagarjun Fertilizers and Chemicals?s merger with Kakinada Fertilizers, iKisan and Nagarjuna Oil Refinery). Again, the controlling or promoter shareholders can use their dominant position to force through certain resolutions?like preferential allotment of warrants, which enables them to take a free-ride on the stock price over an 18-month period (Pipavav Defence and Offshore Engineering Company did this recently when they allotted shares to its promoters and a few friends).

In the past, institutional investors in India have been reluctant to vote either for or against resolutions proposed by management. While the reasons cited include that investor or the sponsor has a ?strategic? relationship with the company in question or no direction from ?above?, most often the reason is philosophical?my vote does not count. In instances where institutional investors do act, they follow Wall Street?s advice of voting with their feet, i.e. selling a company?s shares if they are not happy with the company?s management.

Shareholder democracy cannot be at the expense of shareholder value. There will be times when the benefit of being activist outweighs the cost of an exit. In such instances, shareholders need to voice their views and engage with the owner-managers: they have a fiduciary duty to their individual unit holders to do so. Retail investors have placed their savings with institutional investors to earn higher returns. They have been given to believe that institutional investors can better protect their interests: institutional investors have a large stake in the business placing them in a better position to monitor company performance. It is also easier for a set of large shareholders, vis-?-vis a dispersed set of individual investors, to get together to protect their investments (consequently those of their unit-holders) through exercise of their collective votes.

One final point. Tata Motors is one of the few company?s listed on the Indian exchanges, that trades both voting and shares with differential voting rights.

The relative trading prices tells us that for most of its listing, the DVR share has traded at a discount to the ordinary share (this discount has been as high as R500 per share). Embedded in this is a message to all investors: your vote has a value, exercise it.

The author is managing director, Institutional Investor Advisory Services India, an advisory firm dedicated to providing participants in the Indian financial markets with independent opinions, research and data on corporate governance issues. These are his personal views