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Shareholder Activism and Corporate Governance

The word ‘activism’ sounds revolutionary. So, does shareholder activism mean a revolutionary shareholder? Maybe! After all, we all have the potential to be revolutionary if we exercise our rights, don’t we? This is exactly what shareholder activism means. When a shareholder uses his or her rights to bring about a desired change in a company or to influence its decision, the act is termed ‘shareholder activism’. They contribute to the decision-making procedure. Being able to use one’s rights is a privilege and these activists, as partial owners of the company, know best to use the privilege in the right direction. It gives rise to shareholder engagement with the company. They resort to negotiations, public campaigns, resolutions and proxy conflicts.

However, these shareholders feel the need to intervene only when they sense something not going the right way, are dissatisfied or feel the need to publicise their problems at the forefront. The reasons could be financial like remuneration, corporate restructuring or cost-cutting, or non-financial such as social or environmental concerns. In order to prevent the company from forming a wrong policy or decision, they step up and convince the management to rethink their potential decisions for the betterment of the organisation. Shareholder activism can effectively help prevent corporate blunders.

Carl Icahn popularly titled a “corporate raider” is a remarkable shareholder activist in the financial world. TWA airlines along with American Airlines and Texaco were the leading and largest names in 1985. Just when TWA was at the border of bankruptcy, Carl Icahn successfully undertook a hostile takeover. This is one of the many milestones he achieved. Recently, he has also pointed out an incident of greenwashing. He has disapproved the claim of Southwest Gas Holdings, Inc that it acquired Questar Pipelines to help in its energy transition strategy.

With ESG gaining momentum aggressively, shareholders are demanding companies to integrate ESG factors within their organisation. Shareholders simply want the companies they invest in to perform well. They believe that having the ESG game right can create many opportunities for a company and can help it to achieve new heights. Institutional investors' pressure to introduce ESG-orientated policies can be observed. Shareholder activist campaigns having social and environmental objectives have seen a considerable rise in the past few years. Encouraging companies for ESG integration is also in line with raising accountability and transparency standards through ESG reporting. A company with a good ESG score is today equated with having a good CG mechanism. On the contrary, a bad ESG score might disturb a company’s game in the market. ESG has thus definitely accelerated shareholder activism throughout the globe.

A great example was set by Engine No 1, a small hedge fund. It acquired a minuscule stake (0.02%) in an oil & gas giant, ExxonMobil. It then attempted to revamp the company’s board by launching a proxy contest as it sensed trouble in ExxonMobil’s finances due to climate-related negligence. The hedge fund claimed that the company was facing an existential business risk and no later it received immense support from large institutional shareholders. This success earned the hedge fund 3 seats on Exxon’s board and the company was asked to contribute towards a low-carbon economy. This win was also a win for all minority shareholders who regained faith in the power of their rights. Many such hedge funds are pushing for the much-needed ESG switch.

Another example is that of the NYC Pension Fund. In order to assess board diversity, it came up with a Boardroom Accountability Project. The project involves taking disclosures from companies on their directors’ gender, race and skills.

Corporate Governance is reflective of conduct and a set of practices implemented and actioned by the board in an organisation. A good CG ensures long-term success and is well-known to the shareholders. Through their activism, they try to generate value for the investors. The boards are infused with fiduciary responsibilities towards their shareholders. Their actions directly impact the investors and thus these investors have all the right to question the board on their policies and strategies. They ensure that their policies and strategies are aligned with the current market and regulatory needs and also push them further to have even better corporate governance standards. The bell of shareholder activism rings when shareholders feel that a company’s decisions are going to lead to its downfall. Shareholder activism tries to bring necessary attention and processes to help the company avoid mistakes. Ultimately, a company is known by its board. Shareholders know that through their voting, they can change the face of the board. And through their influence and pressure, they can bring a company’s decision on the right track.

Even though the intention is good, it could also bring negative publicity to a company on the flipside as its practices and decisions come to the public light, leaving a space for everyone to judge. However, the need for shareholder activism would not arise much if there persists strong communication between a company and its shareholders.

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