Rise of shareholder activism

India Inc can no longer expect shareholders to remain calm if their rights are trampled upon. Not just big institutional investors, but even minority shareholders are now turning increasingly assertive to influence corporate decision-making.

Recent developments in the financial markets and in business practices suggest a growing trend in shareholder activism, wherein investors attempt to influence management and corporate practices by raising uncomfortable questions to the top guns of India Inc.

INSTANCES OF ACTIVISM

Very recently, CLSA wrote an open letter to Mr S. D. Shibulal, Infosys CEO and MD, questioning the sustainability of its business model. “The key question on every shareholder's mind is what is troubling the company, which has been the flag-bearer of the Indian IT industry globally and single-handedly raised the profile of Indian equities among foreign institutional investors,” said Mr Nimish Joshi of CLSA, after getting feedback from various small investors.

“My delusions of grandeur most certainly do not stretch far enough to suggest I think I know how to run your business better than you do. Also, I entirely accept that you should not run the business to appease near-term shareholder returns,” Mr Joshi said in his letter.

Earlier, it was The Children's Investment Fund Management that threatened to take Coal India into Court, as the Central Government pushed the company to sign a deal with power producers, inflicting a serious threat to its financial stability.

Generally, investors turn active only when company starts failing on the stock markets, or in its financial performance.

Till such time, most investors prefer remain quiet, even if the company has questionable corporate governance practices.

Recently, many investors of Akzo Nobel India, particularly institutions, had voted against, or abstained, as a protest against the amalgamation of three unlisted entities with itself.

Though the resolution was passed, the post-vote analysis shows that more than 45 per cent of non-promoter votes were against the resolution.

Similarly, when Vedanta Inc announced a complex restructuring exercise that saw the merger of Sesa Goa and Sterlite Industries, many shareholders protested against the restructuring.

Shareholder activism has been on the rise even in the case of public issues. Retail investors gave a miss to most public issues, particularly those of public sector undertakings, as the price was unattractive. But for LIC and State Bank of India, none of the foreign investors participated in the ONGC share auction.

A rare occasion where shareholders showed their mettle was Satyam Computer Services, which is likely to be merged with Tech Mahindra soon.

When in 2008, Satyam Computer Services had decided to acquire Maytas-Infra and Maytas-Infrastructures properties for $1.6 billion, institutional investors protested against the deal and succeeded in reversing the proposal.

The price of properties, which were owned by the then Satyam Chairman Mr B. Ramalinga Raju and his family, were inflated. Had the shareholders been a little prudent earlier, they could have even checked Satyam Computer's misdeeds.

Global phenomenon

Shareholder activism is not India-specific. US-listed Cognizant Solutions and Citigroup also saw assertive shareholders. Citigroup shareholders raised their voice against the ‘hefty' pay packet for its CEO, Mr Vikram Pandit.

In the UK and the US, several financial companies face similar investor ire.

A shareholder of Cognizant Solutions — Los Angeles County Employee Retirement Association — has moved a proposal to make it mandatory for all board directors to be elected annually. The resolution comes in for voting on June 5 at its annual shareholders' meeting. At present, the board has a three-year term.

Cognizant has recommended that all shareholders vote against the proposal.

It would be interesting to see what really happens. Japan's camera maker Olympus' directors also faced small investors' wrath, after the company collapsed due to financial scandal.

Regulator's role

SEBI has also been doing its part on shareholders' activism. In 2010, the market regulator had come out with guidelines that mandated mutual funds to report how they vote at shareholder meetings. Though only a little progress has been made on this front, days ahead will see higher activity from mutual funds.

The role of independent directors has also been keenly watched.

They play an important role in achieving high standards of corporate governance. They should not only be unbiased individuals, but also bring in their independent, varied and expert knowledge to the board.

The proposed Companies Bill states that an independent director must not have “any pecuniary relation” with the company, amounting to 10 per cent or more of the gross turnover of the company.

Fortunately for the Life Insurance Corporation of India, it is not a listed entity.

Otherwise, it may also have to face similar uncomfortable questions from shareholders for its recent investments in public sector banks and ONGC at a steep premium over the current market price.

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