Shareholder activism is on the rise

Shareholder activism is literally the flavour of this AGM season. As company managements come forward to seek shareholder approval on a variety of proposals, these are being scrutinised, questioned, and even effectively vetoed well before the meeting itself. To be sure, this is more visible and vocal than widespread. The debate is also initiated largely by proxy advisory firms than the shareholders themselves. It is partly a misnomer since, unlike the West, in India, it is more about non-promoter shareholder activism. But still it matters, and it is a positive sign.

So what has changed, and how have shareholders started getting their voices heard? Curiously, there is no single specific provision made in law for shareholder activism. Even provisions for proxy advisers are not separately made, but merged with those relating to research analysts.

Rather, it is the synergy effect, and the culmination of several pushes in that direction. The Securities and Exchange Board of India (Sebi) has mandated electronic voting for companies. This is far reaching. Earlier, as if by systematic design to discourage voting, shareholder meetings were held in far off places. Now a shareholder in any far-off corner can, by a few taps on the ubiquitous smartphone, cast their vote.

Then, several important matters are now required to be placed before shareholders, some for 75 percent approval. On matters such as related party transactions, the related parties themselves are barred from voting. Independent directors get a second term only by a special resolution, again giving a decisive say to public shareholders.

Independent directors now have to form a significant part — often half — of the Board, and a substantial part of the audit committee and nomination and remuneration committee. Sure, independent directors are not so much empowered or remunerated but they have a say, and increasingly there is pressure on them to exercise diligence.

While the debate is initiated often because of proxy advisers, it does pick momentum and institutional, and other large and small shareholders also get talking and educate themselves. Company managements respond aggressively, defensively or even comply but they rarely ignore. The promoters/management may give a firm rebuttal, gather forces and seek support to their proposals, and get them approved, even if by their brute majority. They may defensively explain. The matters themselves may be dropped. At times, the promoters may attempt to circumvent the decision by counter measures that conform to the letter of the law. But usually this gets a backlash. But all in all, there is active participation of non-promoter shareholders which earlier could largely be taken for granted.

The activism is not without hitches. Proxy advisers who set the ball rolling by their reasoned recommendations may not have the skin-in-the-game that shareholders have. But this can actually be a good thing, ensuring they are even further aloof, even as shareholders.

Some issues raised are even about too literal application of corporate governance provisions, as if that is the end by itself. A recent example is the objection raised about a promoter director being classified as a non-promoter director. Even if technically correct, it only reminds one of the needlessly cumbersome process law has laid down for reclassification of a promoter to non-promoter, as discussed earlier.

Corporate governance in India is seen as a matter of ticking a series of boxes. For shareholders, what matters is deliverance of shareholder value and corporate governance can only assist in it. It would not be surprising that discerning shareholders ignore some such issues, preferring to have faith in promoters to deliver value than worry about an unticked checkbox.

One again needs to be reminded that the corporate governance principles of the West should not be so easily transposed to India, where facts are different, and family-managed companies dominate having large proportion of shareholding, and thus significant skin in the game.

Also, while accountability is increasingly sought from independent directors, they are not remunerated well considering the seniority and competence they bring to the board meeting table, the time they are expected to spend, and the responsibilities they take up. The present sitting fee permitted by law is paltry, and indeed even shareholders are not given a say in crossing this limit.

There is another side of this activism too. Due to perhaps shareholding being scattered widely, just a 25 percent shareholding is deemed to be control, as even encoded in the SEBI Takeover Regulations. In a scenario of active shareholders, control will need to be redefined at a higher quantitative and qualitative limit. Sebi is already examining this issue.

Shareholder activism, corporate governance, independent directors, proxy advisers, etc. all can act as catalysts and watchdogs. Or rather, to take the metaphor further, act as a tail to rudder to the management, giving them direction. Eventually, it is the management that has to deliver value, and excessive meddling can even be counterproductive. The tail, after all, cannot wag the dog. The seasoned shareholder knows this.

Jayant Thakur is a chartered accountant.

Views are personal and do not represent the stand of this publication.