Is Shareholder Activism on Declining Trend?

Mon, 24 Oct Pre-Open

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Shareholder activism means a person, i.e. shareholder who attempts to use his or her rights as a shareholder of a publicly-traded companies to bring about social change. It is a way in which shareholders can influence a corporation's behavior by exercising their rights as owners. Since some time, the minority shareholders have become increasingly aware in defending their financial interest or voicing their opinion against the management if need be.

Shareholder activism is gaining prominence and is more in India than other Asian countries, as per the report by BNP Paribas titled Asia Strategy. New rules are helping minority shareholders in preventing managements and promoters from using their majority to approve resolutions on related-party transactions (RPTs).

We have seen instances of shareholder activism previously. Take a case of Maruti Suzuki. In 2014, domestic mutual funds opposed the plan of Suzuki Motor Corp to invest in the Gujarat plant and sell cars from that plant to Maruti Suzuki.

Take another case. In July 2014, shareholders of Tata Motors were for the first time able to successfully stall compensation proposals of top executives. India's largest auto maker failed to get 75% of the minority shareholder votes for a proposal for the payment of remuneration to its former managing director, Karl Slym, who died in January, and two other executives, in excess of permissible limits.

However, after the initial spurt, the activism of institutional shareholders seems to be moderating.

The number of resolutions that saw stiff opposition shows a declining trend. In 2016 (January-October), the number is 625 compared 715, 971 in 2015 and 2014 respectively. This year's number represents a fall of 13% from last year and 36.5% from 2014.

Local institutions had started actively participating in the voting process after the Securities and Exchange Board of India (SEBI) made it mandatory to disclose their voting details in portfolio companies a few years ago. However, the number of resolutions that saw stiff opposition shows a falling trend too.

It is utmost important for the shareholders to take active interest in the important decisions of the company. Else it will not be difficult for the top management to take the company shareholders for a ride as was the case in the past. Nonetheless, shareholder activism can become a revolution only if every minority shareholder thinks of himself as an owner and is not afraid of voicing his opinion in critical matters. It shall raise the corporate governance bar in India and put management under additional vigilance.

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