What is Shareholder Activism?

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  • 10 Nov 2023
What is Shareholder Activism?

Key Takeaways

  • Shareholders activism refers to shareholders efforts to impact a company's business activities using their ownership rights.

  • It is pursued primarily for two reasons: rectifying management errors and implementing significant changes in company policies.

  • Various methods of shareholders activism include proxy battles, legal action, shareholder resolutions, negotiations with management and public awareness campaigns.

  • The goal of shareholders activism is to address shareholders concerns and enhance the company's policies for improvement.

When shareholders aren’t satisfied with how a company is doing, they might take action. For example, if a company is making a lot of profit, shareholders could ask for more dividends to be paid to them. Financial reasons for taking action could also include cutting costs, changing how the company is structured, choosing new leaders, or dealing with salaries. Besides financial issues, shareholders might also ask the company to improve in areas like environmental reporting and stopping discrimination. This kind of action isn't done alone. It involves both people inside and outside the company who own stocks. Working together, they can express their opinions widely, leading to quick and profitable results. They can talk directly to the company's leaders or indirectly ask for help from regulators or the media.

Shareholder activists tend to make important changes in a company by using their authority. They can do this by either using the control they already have or by buying more shares to have a bigger impact. These activists are often hedge funds or mutual funds that buy a lot of shares in companies they want to improve. They aim to make the company better, which also makes their own investment more valuable. Shareholders who keep a close eye on the company's actions make sure the company is using its resources wisely through careful management. This careful watch helps the company do better, making more money in the long run. So, both the company and its shareholders benefit from shareholder activism.

When individuals or a group of shareholder activists want to bring about a change, they have various methods at their disposal. These approaches can be diverse, given the different forms the desired change can take.

1. Shareholder Resolution

Shareholders can propose changes during the company's yearly meetings. If most shareholders agree, the company must follow these changes.

2. Proxy Fights

If some shareholders aren't happy with the company's decisions, they can ask other shareholders to vote on their behalf, even if they can't attend the meeting.

3. Publicity Campaigns

Activists can use media like newspapers and social networks to get public attention and put pressure on the company.

4. Negotiations

Activists can talk directly to the company's managers to find solutions. If this doesn't work, they try other methods.

5. Litigation

If nothing else works, activists can sue the company, but this is least desirable because it's not the best solution for both the activists and the company.

The primary goal of shareholders activism is to instigate desired changes by influencing a company's management and activities. In India, the Companies Act of 2013 serves as the primary legal reference for regulatory information related to shareholders activism. Additionally, the Securities and Exchange Board of India (SEBI) has established various regulations that guide shareholder activists in their efforts. According to the Act, certain company matters require approval from shareholders. If shareholders are dissatisfied with the company's actions, they can initiate a class-action lawsuit against the company if other forms of shareholder activism do not lead to a successful resolution.

Another application of shareholders activism involves Proxy Advisory Firms (PAFs), which are regulated by SEBI under the Securities and Exchange Board of India (Research Analysts) Regulations of 2014. These proxy firms assist institutional investors and shareholders in engaging in shareholder activism by offering guidance on how to effectively exercise their shareholder rights. The recommendations provided by PAFs have proven to be highly valuable in using shareholder activism to influence a company's operations.

Conclusion

The past decade has witnessed significant growth in shareholder activism. While many legal reforms have been implemented, there is still a lack of understanding among many shareholders regarding their role within the company. It's essential for them to step forward and contribute to the company's improvement because they are an integral part of it.

Nevertheless, the efforts made by regulatories have not been fruitless. Various studies indicate that there have been shifts in shareholder involvement, and positive outcomes are being observed as a result of these reforms. If shareholder activism is further encouraged, it can benefit not only the corporate sector but also enhance the overall efficiency of the entire country.

FAQs on What is Shareholder Activism

Shareholders engage in activism to improve company performance, governance, and shareholder value.

A shareholder resolution is a proposal submitted for voting at a company's annual meeting, suggesting changes in policies or practices.

Yes, activism can lead to conflicts with management, legal challenges, or reputational risks for shareholders.

Yes, if activism leads to positive changes, it can enhance the company's long-term performance and benefit long-term investors.

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