Shareholder Activism and Corporate Governance

Shareholder activism is the concerted manner by which shareholders of a company can influence its actions or behaviour, by exercising their rights as owners of the company.

While minority shareholders do not run the day-to-day operations of a company, there are several ways by which they influence the actions of the company’s board of directors and/or management. Some classes of shares, such as equity, allow shareholders the right to vote on important decisions of the company. In addition, they can also have continuing dialogue with the company.

Over the years, shareholder activism has increased. Both the Companies Act, 2013 and SEBI LODR Regulations give formal expression to a number of rights, many of which shareholders have had even prior to the legislation and the regulations. They also provide for the categories of proposals that have to be approved by the shareholders in the General meetings. Some of the items on which shareholder approval is required are appointment and reappointment of Director, appointment of Statutory Auditor, approval of financials of the company, approval of some Related Party Transactions etc.

Ministry of Corporate Affairs, SEBI and Stock Exchanges have taken, and continue to take, a number of steps to improve the awareness of shareholders about their rights, duties and responsibilities. Also, there are a number of retail investor associations, with retail shareholders as members, who have been educating retail investors about their role. Of late, some reports of proxy advisory firms, that find a mention in media reports, have also been increasing awareness by raising a number of important questions relating to the proposals of companies. There are also grievance redressal mechanisms set up, by SEBI, with which retail investors can file complaints if the company does not respond to their concerns.

While shareholder activism is good since it makes the company, its Board (who are appointed on behalf of the shareholders to hold management accountable) and the management accountable, shareholder adventurism is counterproductive. There have been several instances where some shareholders have tried to hold a company to ransom, by either not approving some important resolutions (which were beneficial for the company) or by publicly speaking ill of the company. This is best avoided. A company’s success is in the best interest of its shareholders, since as owners they too will benefit in the process.