Shareholder Activism: Driving Change in Corporate Governance
Created on 29 Aug 2023
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What pops into your mind when I mention the name "Hindenburg Research"? You might get flashbacks of January 2023 when Hindenburg Group's report on the Adani Group came out. You might have read many articles to discover what happened and why Hindenburg made these significant allegations about the Adani Group. We are not diving into what happened and why they did so here, but in case you are curious, check this article.
This case has undoubtedly made us familiar with a concept that is gaining popularity recently - the concept of "Shareholder Activism".
Here's a list of what you're going to find ahead:-
- Who are Activist Shareholders?
- How are they formed?
- What changes do they bring to the organisation?
- Potential risks or drawbacks of shareholder activism
- Strategies of Activist Shareholders
- Significant campaign of shareholder activism in India
- The Bottom Line
Who are Activist Shareholders?
An activist shareholder is an individual or group of investors who actively seek to influence the company's decision-making by acquiring a minimum stake in the company's shares to bring about a significant change within or for the organisation.
You must need clarification about why they acquire a minimum stake in a company🧐. The logic behind this step is that a company's shareholder is aware of all internal and external issues of the organisation. Even after listing on the stock exchange, a company can hide its confidential information from the general public but not the shareholders.
The activist shareholders focus on maximising the return on their investment by advocating significant changes that will improve the company's performance in the long term.
How are they formed?
There's no formal procedure to form an individual or a group of activist shareholders in the organisation. They are created when they realise that the company's management requires a significant change in their style or governance decision-making.
To make you understand things in a better manner, here's an example:
Regardless of the industry, every organisation has to deal with shareholder activism. A few years ago, in March 2020, Hugo Boss (one of the largest German clothing companies) announced the resignation of its Chief Executive Officer, Mark Langer, due to pressure from activist shareholders group - Bluebell Capital.
The reason behind this was recording the lowest share price of Hugo Boss in eight years.
"On February 14, Activist Insight Online reported that Bluebell was pushing Hugo Boss to change its management, citing lost momentum and poor execution by Langer, who had previously served as the chief financial officer of the group. "[Langer] might be a good CFO, but we don't think he has the profile and credibility to lead a company like this one," Bluebell partner Marco Taricco told this newswire at the time.
Bluebell Capital influenced the board of directors to change the CEO, significantly impacting the company's top-level management.
What changes do they bring to the organisation?
Activist shareholders bring various positive and negative changes as their primary focus is to unlock shareholder value by recommending significant changes that they believe will improve the company's performance financially & non-financially. Want to learn about these changes? Read below:
- Strategic planning: They may recommend changing the company's business strategies to enhance profitability in the long run.
- Environment, Social & Governance (ESG) issues: Some activist shareholders advocate for ethical practices and ways through which they can promote sustainable development without compromising the current environment. They focus on promoting responsible and ethical business practices.
- Management hierarchy: Shareholder activists may ask to change the top-level management members if their decisions no longer positively impact the shareholders' value.
- Operational changes: Shareholder activists also recommend changing the company's operation or cost-cutting measures to increase profitability.
- Transparency: Activist Shareholders also bring ethical behaviour & encourage transparency in an organisation.
Potential risks/drawbacks of Shareholder activism
Undoubtedly, activist shareholders work tirelessly to add value and safeguard the interests of potential shareholders. However, there exist certain potential hazards associated with them. Let's explore what those are.
- Activist shareholders may disrupt management's long-term goals & objectives if they do not align with their demands in the long run.
- They can cause reputational damage to the company's goodwill.
- Activist shareholders also ask for critical governance decisions if the decision seems no longer profitable.
- Furthermore, activist shareholders focus on short-term profitability, leading them to adopt various unethical measures such as stock manipulation or short selling, which negatively impact the company's valuation.
What strategies do Activist Shareholders use to assert their influence on management?
- Filing shareholder proposals: Shareholder activists often present recommendations or requirements that the management should consider at the board meetings.
- Engaging with the management: Shareholder activists directly engage with the management and the board of Directors to discuss issues prevailing in an organisation.
- Public Release: Publicly expressing their views and demands with the help of media channels.
- Proxy Fights: Launching proxy fights to elect their preferred candidates to the board. Sometimes, these proxy battles are so extreme that they tend to fire out the current board members in the organisation.
- Legal pursuits: Challenging an organisation in the court over any governance decision.
Let us now look at the significant campaigns of shareholder activism in India.
In December 2019, Reliance Industries Limited (RIL) announced a share swap scheme that faced opposition from many shareholders and potential challenges. Let's delve into the specifics of what occurred during that period:
On December 25, 2019, Reliance Industries proposed a share swap scheme for its retail venture shareholders. The proposed ratio was 4:1, meaning investors could receive one RIL share for every four Reliance retail shares. The swap ratio valued the business at ₹2.5 lakh crore.
A few days before the announcement, the stock traded at ₹850-900. After the news of valuing its retail business at ₹2.5 lakh crore, most of the retail investors lost half of their money as the per share price came down to ₹475-500.
The retail venture of Reliance Industries was highly overvalued in the unlisted market, and as a result, the investors lost their valuable money.
During this period, the significance of shareholder activists came into play as they issued threats to challenge the decision in court, compelling RIL to renegotiate the terms. Consequently, faced with substantial opposition from shareholder activists, RIL made the scheme optional in January 2020. This example perfectly demonstrates the relevance of shareholder activism in influencing management's decisions.
The Bottom Line
The last decade has seen a major trend in shareholder activism. If shares are something we are the buyers of, one must remember "caveat emptor," which comes along with these purchases. Buyers of a particular stock must research well before making an informed decision; you can take the help of Ticker by Finolgy.
Activist shareholders represent a significant portion of the ordinary investors. They act like superheroes to them as they can influence management decisions on behalf of individual investors.
Every organisation has faced shareholder activism once or several times, from Zee Entertainment & Reliance Industries Limited to Vedanta & Lupin. So is it a positive force for change?
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