What is Shareholder Activism?

The Indian stock market has provided over 12% returns on investments when traditional investment avenues could only offer 4-5%. With widespread financial literature and advanced technology backed investment platforms, India is witnessing an unprecedented rise in the number of investors willing to apply to; and buy shares in the secondary market. The main motive behind such an increase in investments is to make as much profit as possible through a company’s robust financial health and favourable growth prospects. However, numerous uncertain and random factors can negatively affect a company’s business operations and, thereby, its profitability.

In the case of a publicly listed company making bad managerial decisions, they have to answer to their shareholders who are part owners in the proportion of their percentage investment. To avoid such a situation, shareholders turn to an effective Stock markets process known as shareholder activism.

What is Shareholder Activism?

The word Activism is defined as the process of using various activities such as discussions, campaigning etc., to bring about political and social change. However, in finance, shareholders bring about change through shareholder activism. This concept includes a range of activities undertaken by the shareholders of a company to bring about certain changes in the management and operations of the company. Shareholder activism is always done to influence the governance of the company to ensure the protection of shareholder interests.

Understanding Shareholder Activism

Shareholders do not run the day-to-day operations of a company as the management is responsible to complete the operations. However, shareholders have the power to influence the company’s board of directors and the executive decisions they may take. By exercising their rights as partial owners of the company, shareholders have the right to undertake shareholder activism to ensure they are heard by the company’s management to make the desired changes.

For example, they could be related to environmental concerns, increased political interference, bad managerial decisions, rapid expansion, negligible dividends etc. Irrespective of the title of the desired change, the process of shareholder activism remains the same. However, only the shareholders who have invested in the securities of the company can implement shareholder activism.

Under shareholder activism, shareholders, who are thus known as shareholder activists, influence the operations of the company through the following activities:

• Using media channels to influence the management publicly
• Holding discussions with the company executives
• Threatening to file a lawsuit against the company
• Filing a company-wide petition against the company executives
• Campaigning to ensure their demands are met

Forms of Shareholder Activism

As the desired change can take many forms, the process of shareholder activism started by an individual or a group of shareholder activists include the following types:

• Shareholder Resolution: All publicly listed companies are legally bound to hold annual general meetings at regular intervals. In the process of shareholder activism, the shareholder activists can submit a proposal known as Shareholder Resolution in the annual general meeting. All the shareholders then vote upon such resolutions and if the majority of the votes are in favour, the resolution is passed. The management is then legally bound to act upon the resolution.
• Proxy Fights: If a group of shareholders is not happy with the managerial decisions or the company's operations, they can discuss with other groups of shareholders to persuade them to use their proxy votes. A proxy vote is a type of voting process that allows shareholders who are not present at the annual general meeting to delegate their voting power to the attending shareholders.
• Publicity Campaigns: Under shareholder activism, shareholder activists can use mass media such as newspapers, media channels, social networking sites etc., to draw public attention. The idea is to pressurise the company management to meet the demands of the shareholders.
• Negotiations and Discussions: The activities of shareholder activism can also include the move where shareholder activists hold direct discussions with the company's corporate management. In most cases, negotiations with the company executives are the first step shareholder activists take. If the shareholder activists fail to find a resolution in this step, they move to other forms of shareholder activism.
• Litigation: The process of shareholder activism also includes shareholder activists filing a lawsuit against the company. They can initiate legal action to ensure their desired goals are achieved by the company after they are legally bound by the court. However, this step is least desirable by both the shareholder activists and the company. Hence, litigation is the last step of the shareholder activism process in most cases.

Use of Shareholder Activism

Shareholder activism’s core aim is to bring about desired change by influencing the company's management and operations. In India, the Companies Act 2013 is the act that provides the main source of regulatory information regarding shareholder activism. Furthermore, the Securities and Exchange Board of India (SEBI) has also framed various regulations for shareholder activists to undertake the process of shareholder activism. As per the Act, the company has to take shareholder’s approval for certain matters. If the shareholders are unhappy with the company’s conduct, they can file a class-action lawsuit against the company if any other means of shareholder activism fail to find a successful resolution.

Another use of shareholder activism lies with Proxy Advisory Firms (PAFs) that are regulated by SEBI under the Securities and Exchange Board of India (Research Analysts) Regulations 2014. These proxy firms assist institutional investors and the shareholders in the process of shareholder activism by providing advice on how to exercise their shareholder rights effectively. The recommendations of PAFs have proved to be highly beneficial in the process of using shareholder activism to influence the company's operations.

The importance of Shareholder Activism

SEBI has always focussed on a publicly listed company having to answer to its shareholders for every step taken. Since the shareholders are part owners, every negative step taken by the company management can force the shareholders to lose the value of their investments. Without shareholder activism, the company may continue taking such bad operational and managerial decisions, leading to a substantial fall in its share price.

Shareholder Activism ensures that the company is on the right path of profitability and does not undertake any activity that may force the shareholders to lose their investment value. Furthermore, with the company knowing that shareholder activists have the power to start the process of shareholder activism at any time, which can also negatively affect their goodwill, it tries to be as transparent as possible.

Conclusion

Making up for an ideal way to ensure the company’s profitability and share price remains stable, shareholder activism is one of the most effective stock market actions shareholders can undertake. However, as the process of shareholder activism is regulated by SEBI, it is always wise to consult a PAF before starting the process.