Shareholder activism is here to stay

| Updated on: Dec 05, 2021
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Shareholder accountability has increased in pandemic times. Corporates and boards of directors must step up to the plate

The month of August witnessed the rejection of ESOP Scheme 2021 by institutional shareholders of Lupin Pharmaceuticals followed by the non-approval of re-appointment of Eicher’s Motors Director and MD Sidharth Lal, by shareholders in the AGM.

In both cases, the rise of shareholder activism in times of uncertainty is noteworthy.

The industrial sector is still bearing the brunt of the Covid-19 pandemic. In the upcoming months, shareholders will likely increase their monitoring to ensure that the company adopts optimum measures to weather the pending third wave.

Based on the managerial power theory, CEOs/MD gain excess compensation by exerting power on the board where CEO duality is a standard feature. In such a framework, the boards tend to have weaker monitoring power related to remuneration policy.

The Kotak Committee on Corporate Governance in its 2017 report also highlighted that the dual role of promoters as CEO/MD of the company might promote opportunistic behaviour inducing unethical decisions that might harm shareholders.

The board might resort to such decisions that benefit their compensation without paying heed to shareholders’ interest. The board commands a certain amount of loyalty to the CEO or the managers and fails to maximise shareholders’ wealth.

Good corporate governance involves fixing the appropriate incentives for the key executives. Adopting a stakeholder approach, the senior management of Apollo Tyres accepted a pay cut in 2020 to reduce the financial burden of the company. The gesture is an example of efficient corporate governance where the management stood in solidarity with the disrupted affairs of the company triggered by the pandemic. The effect of the crisis is prolonged, and the demand for a pay hike by Eicher Motors’ MD, seems a preposterous move that did not go down well in the eyes of the shareholders resulting in his non-approval for an appointment.

The Board approved the appointment of Lal as MD of Eicher’s Motors on August 23, 2021, and decided to seek approval once again through a postal ballot with a revised pay structure. However, the incident of Eicher Motors or Lupin is, indeed, a wake-up call for corporates to proactively adapt to new norms of the current business environment and evaluate their governance standards.

A robust corporate governance mechanism is required to boost the confidence of the investors. Firms with effective governance mechanisms shall withstand the crisis better than those with a weak internal control system.

Our research suggests that alternate corporate governance approaches promote an inclusive structure of corporate governance considering the interests of investors, employees, suppliers, customers, government, community, and the environment is appropriate during crisis creating a positive image among shareholders.

R Edward Freeman’s 1984 stakeholder theory of corporate governance proposes that organisations must consider the interests and the role of any group or individual who can affect or is affected by the achievement of an organisation’s purpose. At the same time, the stewardship theory stresses the behaviour of the managers (stewards) working in the best interests of the shareholders.

When the need of the hour is transparent corporate governance through adequate and timely disclosures to shareholders, the decision by Zomato post-IPO in August 2021 to conduct earnings or analysts meet once a year seems to confound. Despite its stellar performance in IPO in mid-July, Zomato reported huge losses for the June quarter.

The rising expenses due to the second wave of the pandemic resulted in credit crunch. The personal pressure of the management to meet the expectations of shareholders could instigate fraudulent acts.

A manager in position of trust is abashed to share the constraints being faced while carrying out his duties. Empirical research in corporate governance identifies “non-shareable” financial issues as pressure points for managers to violate ethical standards and manipulate the company’s affairs. Therefore, management must ensure regular communication with shareholders making them aware of the financial updates of the organisation.

India’s regulatory thrusts

The Securities Exchange Board of India (SEBI) recently recognised the shift in the ownership structures from family control to professional investors. There is a significant increase in financial investors and FIIs in the Indian corporates. FIIs prefer to invest in organisations with strong financial performance and efficient corporate governance mechanisms. The NSE Indian Ownership Structure Tracker (2020) reports that the shareholdings of FIIs have significantly dropped in the March quarter, 2020, and heavy outflow of foreign capital amidst the pandemic. Hence, companies must make decisions that reflect effective corporate governance and preparedness to face the next wave of the pandemic.

The regulatory laws entrust upon the board the duty to work in the best interests of all shareholders and play an indispensable role in monitoring.

Therefore, having an effective board for sound decision-making and strategising is crucial.

In this context, the strategy of Zomato immediately after the IPO in reducing the number of meetings with analysts to once a year and limiting the address of shareholders’ queries through blogs and quarterly results is questionable.

Further, the other two cases of non-approval by shareholders in Eicher Motors and Lupin Pharmaceuticals draw attention that the board should be prepared to face questions related to executive compensation, management practices, and shareholders’ rights in crises.

The prolonged effect of the pandemic is likely to impact shareholders’ activism, creating pressure on managements to evaluate their corporate governance standards. Corporate boards must be proactive in making decisions and strategies to withstand the external changes in the business environment.

At the same time, managements and boards must be prepared to be accountable and address the queries of the rising shareholder activists.

Deb is with Bharathidasan Institute of Management, Trichy, and Chandra teaches at Vinod Gupta School of Management, IIT Kharagpur. Views expressed are personal

Published on December 05, 2021

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