Advent of shareholder activism

It’s encouraging that India has opened the gates for shareholder activism. But activists must  step up to transform their role from being ‘corporate raiders' to ‘corporate makers'

After years of passive participation, the Indian shareholder has come of age with uprecedented levels of activism last year, ranging from minority individual shareholders, institutional investors and also members of promoter group dissenting against boards and management of their companies, the most famous being the case of Tata Sons. According to proxy advisor firm InGovern, 10,972 resolutions were proposed by 1,502 listed companies across all four types of shareholder meetings — AGMs, EGMs, postal ballots and court-convened meetings. It is becoming increasingly evident that Indian investors cannot be taken for granted as their participation in shareholder meetings and voting is on the rise. Does that mean that the rise of the activist shareholder would augur well for India Inc?

A shareholder activist attempts to bring about a change either in the policies or the management of a publicly listed corporation using his/her rights as a shareholder, a famous example being Carl Icahn, who was nicknamed ‘corporate raider’ in the 1980s due to his hostile takeover of TWA Airlines, which  over the subsequent years, was steered away from the brink of bankruptcy. The US, the cradle of shareholder activism, saw the transformation from individual activists to institutional with new funds entering this market niche in the 90s.

These new funds raised money from other investors and used minority board representation (ie, one or two board seats, rather than a board majority) to influence corporate strategy. Over the years, shareholder activism is no longer confined to the US and has spread to other countries as well. According to FTI Consulting, in 2017, the highest upsurge in activism was witnessed in Australia, Canada and the UK. Although companies in Asia have more closed and controlled ownerships with family or Government interests, with relatively passive institutional and retail investors, the trend is changing now.

Back home, last year, Indian minority shareholders put a feisty opposition to several board resolutions and came up with new proposals.  A good example is that of Raymond, where the proposal to sell one of its prime properties to its Chairman and some of his relatives at a price which was lesser than one-tenth of the market value, failed to pass as majority of the institutional investors voted against the proposal.

This rise in activism in India is attributed to the shift from individual activists to institutional investors, like Unifi Capital, Florintree Advisors, IDBI Trusteeship and India Horizon Fund. It is heartening to see that under the leadership by Unifi Capital, in an extraordinary move, a group of more than 1,000 small shareholders sought an appointment of a ‘small shareholder director’ from Alembic. Although Alembic rejected the proposal, this sets an example for various requests from small shareholders in future. While shareholder activism is on the rise, it is very difficult to bring about any changes due to large shareholding of promoters/promoter groups in India. Attempts for minority representation on the board to address the management’s inaction and to stop activities that were not in the best interests of the company and minority shareholders, have failed in the past, like in cases of MRO-tek Realty, PTC India and Religare Enterprises.

On the other hand, activism led by promoters is proving to be effective, where a campaign led by Narayan Murthy, co-founder of Infosys, India’s second largest IT company, was able to oust the Chairman, the CEO and two other independent directors from the board on concerns like excessive remuneration to the CEO, lack of transparency in acquisition of Panaya, an Israeli company and payment of excessive severance fees to former key management persons. This drive also saw the return of one of the co-founders, Nandan Nilekani to the board as its non-executive chairman. This was preceded by the axing of Cyrus Mistry as the chairman of Tata Group, a rare instance in the Indian corporate history, where the promoter publicly sought ouster of one of its own nominees on the board.

Shareholder activism has seen a tremendous growth over the last decade and particularly after the global financial crisis, from a few activist funds managing less than a total of $12 billion in 2003, to more than $250 billion in assets under management for activist hedge funds in 2017 and at a global level has influenced firms’ strategic and financial decision-making profoundly.

In post financial crisis conditions, activists have been fairly successful in re-branding their image from ‘corporate raiders’ to ‘defenders of corporate ethics and shareholders’ wealth’. There are several core company specific factors that drive shareholder activism apart from macro drivers. One of the foremost reasons for activist campaigns is when companies underperform relative to peers or the broader market.

Second, activism can be seen if the firm is under-levered or has excess liquidity as this is risky, particularly when the market is unclear about the company’s rationale for the large reserve. For multi-business companies, activists are also alert for one or more of the company’s business lines or sectors that are significantly underperforming in its market. Activists also work to return capital to shareholders in the form of dividends or share buybacks.

Third, in cases where firms lack strategic clarity, activism helps in bringing the same by either divesting or spinning-off one or more divisions or assets, thereby creating several more focused entities and allowing each entity to be properly valued by the market.

Fourth, the firm should continuously seek a higher premium for a proposed sale or abandon a proposed acquisition which may not bring synergies; and lastly, activists are effective in promoting corporate governance issues like a well-functioning board, transparency in management compensation issues, high barriers for shareholders to effectuate change and so on. These categories are broad and most activist campaigns will include many different proposals that will likely touch on many different themes. The advent of mass media as a powerful channel of communication has also helped activists spread their message using traditional media, digital media and dedicated business news channels.

It is a known fact that worldwide, activist holding periods are typically short-termed, with half of activist campaigns being shorter than six months and over two-third of the campaigns last less than one year. This shorter term focus may lead them to promote decisions that may not necessarily maximise shareholder value in the long term which ultimately is detrimental.

In this new environment, where shareholder activism is here to stay and potentially increase in future, firms need to be prepared to understand how activism can affect them. It is paramount for leadership teams and boards to develop transparency and good corporate ethics and effectively communicate the merits of the current strategy to the company’s shareholders.

Shareholder activism is like a double-edge sword. It can be either used to create or destroy. Shareholder activists should step up to transform their role from just ‘corporate raiders’ to ‘corporate makers’, who look beyond breaking companies for obvious potential benefits to help monitor and create organisations with visionary boards with clear operational and financial strategies for improving the overall shareholders’ wealth and in the process, pave way for constructive activism.

(The writer is Assistant Professor, Amity University)