Finance

Shareholder Activism

What is Shareholder Activism?

Shareholder Activism is a way by which the shareholder of a publicly traded corporation attempts to use his/her equity stake in the company to achieve certain goals. The main goal of shareholder activism is to bring change within or for the company. These changes range from environmental concern to governance or profit distribution to internal culture & business model of the company. Activist shareholders intend to affect the behavior of the company by exercising their voting rights as partial owners. While minority shareholders do not run the day-to-day operations of a company, several ways exist for them to influence a company’s board of directors and executive management actions. These methods can range from dialogue with managers to formal proposals which are voted on by all shareholders at the company’s annual general meeting.

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Objectives of Shareholder Activism:

  • To have an independent watchdog on the management.
  • To protect shareholder’s value.
  • To ensure transparency & accountability.
  • To fight against corruption.

Reasons for Shareholder Activism:

  1. Protection of minority shareholders: The expropriation of minority shareholders and lack of monitoring function creates a doubt on the protection of shareholders’ value. This is one of the most important causes of shareholder activism.
  1. Agency problem and moral hazards of management: Agency problem refers to a conflict of interest between a company’s management and the company’s stakeholders. When shareholders feel their value is ignored by the company’s management, shareholder activism may take place.
  1. Weak enforcement of laws & regulations: Although there exist some laws for shareholder protection, laws are sleeping in the book. Weaker enforcement of laws may force shareholders to take action.
  1. Poor corporate governance practices: Illegal or unfair related party transactions such as cross debt guarantee, hidden debt, sales, and purchase among affiliated companies and other such poor governance practices will force the shareholders to take action.
  1. Shareholders’ dissatisfaction: If the shareholders are dissatisfied with the response from the company, it may then seek to escalate its campaign by exercising their rights under laws.

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Types of Shareholder Activism:

  1. Shareholder resolution: Shareholder resolution is one of the effective ways of engaging the public’s attention. This includes a proposal that can be submitted by shareholders for a vote at the AGM.
  1. Proxy fights: A proxy vote is a form of voting where either shareholder is not willing to or is not able to shareholder’s meeting and delegates his/her voting power to a representative. When a group of shareholders is not convinced with the decision or management of the company, it may persuade other shareholders to use their proxy votes to effect changes.
  1. Publicity campaigns: A publicity campaign is a way by which activist shareholders put pressure on the company’s management by using mass media to draw the public’s attention to a problem or issue in the company.
  1. Negotiations with management: Activist shareholders can simply reach the goal of making changes in the management of the company by the way of negotiation.
  1. Litigation: Activist shareholders can initiate legal action against the company’s management to reach their goals. This option is least desirable for both, Company’s management and shareholders.

How Can a Company defend against Shareholder Activists?

  • A company can critically identify any potential weakness or risk, which forces the shareholders to take action, including corporate governance issues, financial performance, and perceived valuation of the company.
  • A company can proactively communicate with shareholders to effectively convey a strong and strategic vision. Proactively addressing concerns that can be raised by shareholder activists and engaging with them when the opportunity arises may help.
  • Legal defense strategies can be applied with input from appropriate advisers when there is a conflict of interest. This defense could be used in response to a shareholder activist but it would be less effective in mitigating against the activist’s surprise attack.

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It is concluded here, therefore, that shareholder activism is a real and direct method whereby shareholders/shareholders can encourage changes in and/or for companies using their rights and thus encourage changes in strategies of the organization relating to any corporate, economic, social responsibility, or other such issues.

Author: Hetvi Shah

About the Author: Hetvi is a BBA(Finance) graduate. She is currently pursuing an MBA with Finance specialization. She has a keen interest in the financial market, financial management, and financial analysis.

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