Shareholder Engagement or Activism ?

Continuing from my last post ‘Is shareholder engagement good for companies?’, here we look at the scope of shareholders engagement and different approaches to shareholder engagement.

What is the scope of shareholder engagement? 

Shareholders have a legitimate role in areas pertaining to

• Corporate Strategy – such as mergers, diversification, restructuring, non core asset sale.
• Capital Structure – such as capital allocation discipline, use of cash on balance sheet.
• Governance – such as audit-related issues, board structure, managerial remuneration

However shareholders are not expected to micromanage companies. Nor is it desirable that shareholders push for short term profitability over sustainability and long term value creation. It is important that shareholders and board members engage effectively in the shared pursuit of high quality governance.

What are the different ways in which shareholders engage with companies?

Shareholders can either have a proactive approach for engagement with a company or may adopt a passive approach towards a company.

 Passive investors sell off their shares if they are dissatisfied with the corporate decisions.

On the other hand, active investors engage proactively with the management, prior to a corporate decision being affected, in order to change the outcome of the decision. While the term ‘shareholder engagement’ is used to describe a collaborative approach, ‘shareholder activism’ refers to the use of a more assertive approach by the minority shareholders to affect changes in management and strategy of a firm.

The approach to shareholder engagement varies in different countries.  Depending upon the business environment, legal contexts, and their own investment objectives, shareholders may adopt a collaborative, confrontational or mixed approach. Institutional investors like mutual funds and pension funds who tend to hold onto their investments for long-term returns adopt a cooperative approach with management, whereas hedge funds, with short term objectives, may adopt a more confrontational approach. Some countries provide more legal tools for shareholder activism than others. For example in UK, shareholders have a greater influence in questioning management activities and dealings than in the US. 

Global trends and practices in shareholder engagement 

Some global trends and practices in shareholder engagement include 

·         Disclosures.

·         Shareholder voting.

·         Shareholders say in appointment of auditors and directors.

·         Shareholders say in remuneration of the directors.

·         Shareholders’ approval of related party transactions.

·         Class actions that allow a group of investors with common interest in a matter to sue the management of a firm, its auditors or a section of shareholders in case of suspected wrongdoing.

·         Shareholder engagement through proxy advisory firms that analyze corporate proposals placed for shareholder approval and give their recommendations regarding the proposals.

While there are different ways in which shareholders engage with companies, shareholder participation in corporate affairs remains a function of business environment, legal contexts and ownership structures of companies.

Related articles

• Investor Participation in Corporate Governance
• Is shareholder engagement good for companies? 
• Companies Bill 2012 - Giving Voice to Minority Investors in India (prepforum.wordpress.com)
• Shareholder Activism Run Amok (wnyc.org)