Is Shareholder Activism a means to ensure Corporate Governance?
October 23, 2023
A key component of contemporary business is corporate governance, which is the structure through which a corporation is managed and governed. It includes a collection of procedures, systems, and connections that control how decisions are made, who is held accountable, and how transparent information is shared inside an organisation. Making sure that the interests of shareholders are in line with the actions and strategies of the firm is a crucial component of effective corporate governance.
Corporate governance can now be influenced and shaped by shareholders thanks to a method known as shareholder activism. An in-depth discussion of shareholder activism, including its numerous manifestations, drivers, effects, and contributions to successful corporate governance, is provided in this article.
What is Shareholder Activism?
Shareholder activism is a complex phenomenon that includes a range of shareholder actions taken to affect a company’s operations, policies, and strategies. It essentially symbolises the effort made by shareholders to speak up and have a say in the governance and course of the business in which they own a stake. The broad term “shareholder activism” refers to a variety of actions, from constructive dialogue with corporate management to more assertive ones like putting resolutions forward at shareholder meetings and asking to be represented on the board of directors.
The quest for value maximisation is one of the main driving forces behind shareholder activism. Activist shareholders promote policies and choices that support the company’s long-term growth and profitability to maximize the returns on their investments. They understand that a company with sound governance and effective management is more likely to produce long-term value that will benefit shareholders. The demand for accountability and openness is another important motivator. Activists frequently call for more transparency in areas like executive salaries, financial reporting, and general decision-making procedures. In order to keep the company’s management accountable for their actions and to make sure that shareholders are well-informed about the company’s operations and strategies, activists advocate for greater transparency.
Shareholder activism is often driven by ethical and social issues. Numerous activists work to persuade businesses to follow moral business principles, encourage social responsibility, and adhere to broader cultural norms. This component of activism reflects a rising understanding that companies have a responsibility to do more than just make money; they also have a responsibility to improve the communities and surroundings in which they operate.
Shareholder activism acts as a means by which investors actively participate in determining the course of the firms they invest in by advancing effective governance practices, encouraging responsible behaviour, and confronting complacency. In the end, shareholder activism symbolises the notion that investors can influence good change beyond the balance sheet and are not simply passive recipients of a company’s success.
Forms of Shareholder Activism
Shareholder activism takes many different forms, each with its own goals and tactics:
Communication and Engagement: Shareholders can communicate with corporate management through meetings, correspondence, or conversations to voice their concerns, make changes, or request justifications for decisions. This type of activism aims to influence decision-making through enlightened discussion.
Proxy Voting: Shareholders use their voting rights to support or oppose proposals put forth by the firm at annual general meetings (AGMs). Shareholders can voice their preferences through proxy voting on topics like executive compensation, board makeup, and corporate strategies.
Shareholder Resolutions: Proposed resolutions on corporate governance, environmental responsibilities, social issues, or CEO compensation may be made by activist shareholders. During AGMs, these resolutions are put to a vote and have the power to alter corporate guidelines.
Proxy Contests: In more extreme forms of activism, shareholders could try to replace board members with people who share their opinions. In proxy fights, shareholders are urged to support the activist’s chosen candidates by casting their votes on their behalf.
Litigation: In extreme circumstances, shareholders may turn to legal action to contest corporate decisions they believe are unlawful or damaging to shareholders’ interests.
Why Shareholder Activism?
Shareholder activism has a variety of motivations:
Value maximisation: By supporting policies that support long-term growth and profitability, shareholders want to increase the value of their holdings.
Accountability and Transparency: By calling for more openness in executive salaries, financial reporting, and decision-making procedures, activism can improve accountability. Shareholders may promote corporate responsibility, moral business conduct, and sustainability, urging businesses to concur with more general social principles.
Effectiveness of the Board: Activism can encourage changes in the makeup of the board to ensure independence, diversity, and the range of expertise required for efficient supervision. Risk Reduction: In order to protect shareholder value, activists may address risk-related issues by pressing businesses to manage risks effectively.
Are there any challenges?
Short-Term Emphasis: The possibility of a short-term emphasis is one of the major difficulties in shareholder activism. Some activist shareholders could prioritize short-term advantages over the company’s long-term viability and wealth development. This may put pressure on businesses to prioritise short-term earnings over long-term development and ethical business practices. Such narrow-mindedness could hinder the business’s ability to provide lasting value for all stakeholders.
Conflicts of Agenda: Shareholder activism involves a wide range of actors, each with their own interests and ambitions. Conflicting agendas among various activist shareholders may result from this. The development of a united voice might be hampered by disagreements over strategic direction, governance changes, or even ethical issues. It can be difficult to come to an agreement on the best course of action, which might lessen the impact of activism activities.
Costs and Distractions: Participating in shareholder activism, especially through techniques like proxy battles or legal lawsuits, can result in significant financial costs for both the activists and the corporation. These expenses may take precious resources away from the business’s main functions, which could hinder its capacity to successfully carry out strategic initiatives. Furthermore, the emphasis on satisfying activist demands may divert management, impairing their concentration on managing the company and achieving long-term objectives.
Risk of Overreach: While shareholder activism might offer insightful viewpoints, overreach is possible. Demands from activists that conflict with the business’s strategic vision or operational reality can undermine its stability and have a negative impact on shareholder value. Implementing changes that could be better thought out or compatible with the company’s business strategy may have unforeseen results and erode shareholder confidence.
Impact on Management: Vigorous and persistent shareholder activism can put the management of a firm under a lot of strain. Management may need to be more focused on carrying out strategic plans and day-to-day operations by constantly satisfying shareholder requests, engaging in discussions, or even dealing with proxy wars. This situation raises questions about the firm’s capacity to successfully carry out long-term plans, perhaps impeding innovation and growth.
What impact does Shareholder Activism have on Corporate Governance?
Corporate governance is greatly influenced by shareholder activism, which produces a number of advantageous results. First, activism promotes increased accountability by forcing businesses to adopt better disclosure practices and greater openness. By improving communication regarding corporate strategies and choices, this shift towards openness enhances the bond between management and shareholders.
Second, board independence is frequently the target of shareholder activist campaigning. Activists reduce conflicts of interest by campaigning for the recruitment of independent board members, ensuring that the board’s oversight operates impartially. This increased independence helps the company’s decision-making processes have more effective checks and balances. Third, shareholder activism promotes aligning management’s and shareholders’ interests. Management becomes increasingly aware of shareholder expectations as activists push for policies that improve long-term shareholder value. This alignment fosters a culture of ethical and sustainable decision-making, which supports the stability and expansion of the business.
Fourth, better risk management is influenced by activism. Activists make firms aware of potential problems that could go unnoticed, forcing them to take preventative measures. This focus on risk reduction protects shareholder value by reducing the possibility of value loss brought on by unforeseen difficulties. Fifth, shareholder activism results in the production of long-term value. Activists regularly emphasise the significance of sustainable practices and tactics beyond short-term financial rewards. Activists support the development of resilient business models that produce lasting value for shareholders and other stakeholders by prioritising environmental, social, and governance factors.
Finally, activism encourages an innovative and adaptable culture within businesses. Acting as external catalysts, activists encourage companies to maintain flexibility and responsiveness to shifting market circumstances. Companies are inspired by this pressure to investigate novel methods, technologies, and techniques, allowing them to maintain their competitiveness in market environments undergoing rapid change.
By providing a way for shareholders to make sure that their interests and the activities of the company are aligned, shareholder activism has developed into a potent tool for influencing corporate governance. While activism has the potential to effect positive change, it must balance the demands of the here and now with the development of long-term value. Shareholder activism can support good corporate governance by encouraging openness, responsibility, and moral behaviour. As a result, shareholders, other stakeholders, and society at large stand to gain. The relationship between shareholder activism and corporate governance will continue to be a dynamic force determining the future of corporate practices as organisations face complicated problems.