Shareholder Activism : Who, How and Why ?

By December 29, 2015 Articles No Comments

Shareholder activism is the means through which investors assert their power as owners of equity shares of a company with the objective of enhancing shareholder value over the long term.

Activist investors usually take considerable, concentrated stakes in a few companies at a time. They try to influence the company’s behavior by informing the board of directors about the needs of the shareholders, and put pressure on management to make changes that range from adopting environmentally friendly policies, changing corporate governance to even financial policy changes. Some of them even get strategically and operationally involved in the companies in which they own stocks. Their main goal is to unlock shareholder value – either through management changes or financial engineering methods for short to medium term gains. However, several investors have recently taken on a more long-term interest in companies to the extent of taking board seats, restructuring the entire business and providing new strategic directions.

 

Activist Functioning 600px

Who are Shareholder activists?

  • Hedge Funds
  • Pension Funds
  • Investment Funds
  • Religious or Environmental groups
  • Mutual Funds
  • Individuals

Motives of Shareholder activists

  • Sale or other strategic transaction
  • Change in management or Board composition
  • Return cash to shareholders by declaring higher dividends or share buybacks
  • Reduce costs
  • Eliminate business lines or products
  • Enforce higher ethical and/or environmental behavior

Modus operandi of shareholder activists

  • Does extensive research on the target company and the industry to know its strengths and weakness
  • Contacts company with his proposal
  • If the management agrees, the proposal is implemented and public scrutiny is avoided
  • If the management does not agree, the activist takes his proposal public
  • Tries to gather other investors who share his views
  • Calls for a General Meeting and demands a vote

Companies which can be targets of shareholder activism

  • Who have performed poorly in the recent past
  • Who have high cash balances
  • Companies who have low promoter holdings
  • Companies in industry which is facing tough environment

Shareholder activism in India

Though shareholder activism is common in the developed countries, it has started taking hold in India. Investors have begun to voice their displeasure and in some cases have forced companies to change their position. With the advent of social media, increasing penetration of internet and rise of proxy advisory services, shareholder activism is bound to increase in the days to come. A company should be ready to deal with the activists in case it becomes a target.

A survey on shareholder activism among shareholders reveals interesting findings. These findings are presented in the graphic below:

pie chart 600px

(Source: IiAS Institution Investor Survey 2014)

Some recent examples of shareholder activism in India are:

  1. United Spirits (November 2014): United Spirits’ parent Diageo PLC wanted to make, sell and distribute some of its UK brands in India through United Spirits. However, minority shareholders of United Spirits rejected the proposal citing lack of financial details
  2. Maruti Suzuki India Limited (January 2014): Maruti’s parent Suzuki Motor Corporation proposed to establish a new plant in Gujarat and Maruti was to buy cars from parent. Many shareholders feared that this would harm Maruti’s prospects and protested against it.

In the next blog we will discuss steps to be taken by a company if it becomes a target of shareholder activism.