Shareholder activism is the collective use of the rights of the shareholders,
aimed at changing an undesirable state of affairs in the operations of the
company or to influence the management in governing the company, while remaining
invested in the company, to protect the interest of the shareholders.
The recent developments in Indian law have led to increased corporate governance
standards, creation of new shareholder remedies and improvement in shareholders'
rights. The enactment of Companies Act, 2013 is the main source of law relating
to shareholder activism. In addition to the Act, regulations framed by the
Securities and Exchange Board of India (SEBI) also provide rights and remedies
to the shareholders of listed companies.
Under the Companies Act, shareholder approval is required in certain matters.
Facility of e-voting is also to be provided as shareholders may be dispersed
geographically (Section 108). In addition, they may bring class action suits
against the company (Section 245) or sue the company for oppression and
mismanagement (Sections 241-244).
SEBI Regulations also provide additional rights and remedies to shareholders of
listed companies. Under SEBI Regulations, listed companies are mandatorily
required to constitute a stakeholder relationship committee to provide a
mechanism for redressing shareholder grievances. The shareholders may also exit
from the management in certain situations.
Due to the ease of exercising, and enforcement of shareholders' rights,
shareholders are now more willing to voice their opinion, resulting in increased
The rise of proxy advisory firms has also contributed to shareholder activism.
Proxy advisors give recommendations for voting at corporate proposals and major
corporate transactions. They help shareholders make an informed decision,
according to what is best for the company and their investment.
While minority shareholders do not run a corporation, nor do their stakes enable
them to bring about an effective change, a group of shareholders together, may
achieve this deficiency of control. This way they can exercise their ownership
rights and influence a company's board of directors and executive managers.
Shareholders individually may not be able to make any impact, but together, they
can influence the decisions and policies of the company.
Issues addressed by shareholder activism may be financial, such as cost cutting,
increasing shareholder value, capital inefficiency, under-performance, or
non-financial, such as greater accountability and transparency of environment
degradation and social performance, ensuring good governance within the company,
or change in internal structure of the company due to poor management by the
board of directors. Activism may also address the problem where the management
does not adequately respond to the shareholders concerns.
Methods may range from exercising their right to vote on company policies at
AGMs and EGMs, strategic use of media channels for publicizing their demands,
negotiating with the company management, proxy contests, to even threatening law
suits in the form of class action suits. While any activism should not be
understated, in most cases activism leads to a seat at the board who acts as the
voice for the minority shareholders.
Shareholder activism continues to grow and intensify. According to Harvard Law
Review, 2018 was the record year for shareholder activism and statistics
continue to grow in this regard.
The influence shareholder activism has over a company, has changed the mindset
of directors, managers and institutional investors while making strategic
corporate decisions. Board and Senior Executives are thinking like an
. Companies now take into account a potential activist challenge
that they may come across with their capital allocation, oversight of companies'
operations, and management. They have been working to identify and address
possible areas of vulnerability to shareholder activism.
Institutional investors, who previously had been passive in connection with
their investments, have become more involved and vocal. The largest investors
have developed in-house capabilities to evaluate companies' proposed
transactions and other events and they increasingly have weighed in on and been
willing to support activist campaigns, both behind-the-scenes and publicly.
Shareholder activists may pose a significant threat to a company's financial
well-being if their criticism relates to a company's business. The broader the
voiced concerns are shared, the greater the effects of the campaign. Successful
implementation of a shareholder activist campaign does not only affect
short-term sales, but may result in fall of market value, increased difficulty
in tapping the capital markets, and may hamper customer and supplier relations.
With increased awareness of environment, social, and governance factors of a
company, and the significant bearing it has on the company's long-term
prospects, ESG activism is on the rise. Institutional Investors, have shifted
their focus from a profit-oriented outlook, to an all-round approach, where the
company's ESG performance is also considered. This has accelerated activism more
towards governance-related topics.
How should a company respond to a shareholder activist?
- A company should always listen attentively, and objectively consider the
- Look for areas around which to build consensus. In an early stage, it is
often possible to agree with an activist investor to implement certain
changes within a reasonable period of time.
- Actively engage with the company's key stakeholders to tell the
- Critically evaluate all business lines and market regions.
- Develop an engagement plan that is tailored to the company's
shareholders and the issues that the company faces.
With the rise of shareholder activism, companies are required to maintain good
corporate governance standards while ensuring shareholder engagement. Companies
should give preference and take into consideration small shareholders when
making major corporate decisions. The board should actively take care of
minority shareholders and should strive to actively discuss with them regardless
of any activist activity.
When an activism is concluded, the risk of another activism does not go away.
Depending on how the company has responded to the activism, the company may
again be targeted. Incorporating a preparation strategy should be an ongoing
process, and periodic self-assessments should be conducted. A tailor-made
shareholder engagement program is crucial in enhancing shareholder dialogue and
strengthening its long-term relationship with investors.
- Gail Weinstein, et al., The Road Ahead for Shareholder Activism, Harvard
Law Review, https://corpgov.law.harvard.edu/2019/02/13/the-road-ahead-for-shareholder-activism/
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