The power of shareholder activism as a catalyst for corporate change

Shareholder activism is like a strong wind that has changed how big companies are managed in recent times. It happens when people who own shares in a company try to make the company do better things. These shareholders want a say in how the company makes decisions and improves things.

People who get involved in shareholder activism have different goals. Some want the company to be more fair and open in managing it. Others care about things like the environment, how the company treats its workers, and whether it’s being run ethically. 

In this article, we will look at shareholder activism, where it came from, how it affects how companies are managed, and how it helps make businesses do the right things.

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Shareholder activism explained

Shareholder activism involves shareholders attempting to impact a company’s business activities by exercising ownership rights. This practice serves two primary objectives: rectifying management errors and implementing significant changes in company policies.

The methods used for shareholder activism encompass proxy battles, legal actions, proposing shareholder resolutions, reaching agreements with the management, and launching publicity campaigns. Ultimately, shareholder activism aims to shed light on shareholder’s concerns and enhance the company’s policies for improvement.

Who is a shareholder activist?

A shareholder activist is generally a hedge fund that buys significant high stakes in companies to change their operations. It is all about targeting companies that have been performing much worse than their peers or the overall market for a long time. Activist investors invest a significant amount of money in these struggling companies, and they do it with the clear goal of influencing the company’s management to make specific changes that will benefit the shareholders.

To do this, an activist investor first figures out why the company has been doing so poorly for so long. They look at things like the company’s strategy, finances, operations, and organisation. Then, they develop recommendations for changes that could help the company’s stock price go up.

The main goal of an activist investor is to create a situation or event that will make the company more valuable, leading to an increase in the stock price. There are two main ways activists try to make this happen. First, they might work to change the company’s overall strategy. This could involve things like getting new people in charge, making better decisions about using the company’s money, deploying its assets differently, or even selling off parts of the company. Second, they can push the company into paying more dividends to shareholders, buying back its shares, or improving its financial health to make it more efficient and profitable.

Unlike private equity firms, which purchase companies to restructure and sell them for profit, activist investors typically refrain from obtaining complete or majority ownership stakes. Instead, they rely on public communications and private dialogues to garner support from other shareholders and individuals within the company.

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Types of shareholder activism:

• Shareholder resolution: Shareholders propose resolutions at annual meetings, and if the majority approves, the company must act on them.

• Proxy fights: Dissatisfied shareholders may convince others to vote on their behalf if they can’t attend in-person meetings.

• Publicity campaigns: Shareholder activists use media and social platforms to pressure companies into meeting their demands.

• Negotiations and discussions: Activists often start by talking to company executives; if no resolution is found, they explore other options.

• Litigation: Legal action is the last resort, initiated when all else fails, to ensure compliance with shareholder demands.

Shareholder activists examples

One of the earliest and most famous examples of shareholder activism occurred in the 1930s when Benjamin Graham and David Dodd advocated for improved disclosure and transparency in financial reporting. Their work laid the foundation for modern securities regulation and influenced the development of shareholder activism as a legitimate strategy for corporate change.

A noteworthy example occurred with Tata Motors in the middle of 2014 when its shareholders voted against granting a salary increase to the then-Managing Director, Karl Slym, along with two executive directors. This event was quite surprising as it marked an unusual instance of shareholder activism within the Tata group, which was unexpected at the time.

Another instance of shareholder activism can be found in the Adani versus Hindenburg case. In this situation, the activist investor Hindenburg issued a report alleging that the Adani Group was manipulating stock prices. Following the release of this report, THE HINDU data indicates that the Adani Group’s stock value dropped by nearly 56%.

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Shareholder activism outcomes

Let us look at the uses of shareholder activism to improve corporate finance of a company:

• Improved governance: Activist shareholders push for better transparency, independence, and accountability in corporate boards, leading to improved governance practices.

• Boosted value: Activist investors target underperforming companies, advocating strategies like divestments and share buybacks to increase shareholder value.

• ESG focus: Shareholder activism emphasises environmental, social, and governance (ESG) issues, prompting companies to address climate change, diversity, and ethics.

• Board diversity: Activists promote diverse corporate boards, recognising that diversity leads to better decision-making.

• Enhanced engagement: Shareholder activism encourages companies to engage with investors, addressing their concerns constructively.

Conclusion

Shareholder activism has become a powerful force for change in the corporate world. It has led to improved corporate governance, enhanced shareholder value, and increased attention to ESG issues. However, it also faces criticism and challenges, which underscore the need for responsible and ethical activism.

As shareholder activism continues to evolve, companies need to engage constructively with their shareholders and consider their concerns seriously. By doing so, companies can harness the potential of activism to drive positive change and promote responsible business practices in an increasingly complex and interconnected global economy. Shareholder activism is not just a trend; it is a fundamental aspect of modern corporate governance that will continue to shape the business landscape in the years to come.