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  The Rise of Shareholder Activism

Introduction to the Rise of Shareholder Activism

Improving corporate governance has tended to focus on developing a framework of rules. Whilst rules are important, it is also important for shareholders to play their part by actively monitoring and controlling the behaviour of directors. In this part, we recognize the major shareholders of listed companies and discuss their role in establishing good corporate governance. We also refer why there has been larger shareholder activism in current years.

Forms of activism

It is significant to be clear as to what is meant by the word 'shareholder activism' as it can take several forms. In its very simple form it includes taking a more active role in voting for or against the resolutions put before the yearly general meeting or any extraordinary general meeting of the company. This type of activism is seen through the government like being very important to good corporate governance. The government is devoted to see a much higher level of participation than presently exists and expects institutional shareholders to use their right to vote. In the past, financial institutions have frequently pointed out their dissent through abstaining from a vote than outright opposition to a resolution.

Though, there is some proof that they are now more ready to use their vote to oppose resolutions of the board of directors. Much of the proof though remains anecdotal rather than relies on systematic research.

A specifically rich source of contention among shareholders and directors concerns directors' remuneration and there have been various shareholder revolts over this issue.

Although shareholder revolts are widely reported and catch the newspaper headlines, they do not happen very frequently. However, the benefits for shareholders of flexing their muscles and voting against resolutions put forward through the directors may go across their immediate, intended objective: other boards of directors might take note of shareholder dissatisfaction and adjust their behaviour to avoid a similar fate. The cost of voting require not be high as there are specialist agencies that offer research and advice to financial institutions on how their votes should be cast.

Another form of activism involves meetings and discussions between representatives of a particular financial institution and the board of directors of a company. This requires a fairly high degree of involvement with the company and some of the larger financial institutions have dedicated teams for this purpose. This can be, therefore, a costly exercise.

Such meetings can be a useful mechanism for exchanging views and for gaining a greater understanding of the needs and motivations of each party. This may help to pre-empt public arguments between the board of directors and financial institutions, which is rarely the best way to resolve issues.

The final form of activism involves intervention in the affairs of the company. This, however, can be very costly, depending on the nature of the problem. Where strategic and operational issues increase concerns, intervention can be extremely costly indeed. Identifying the weaknesses and problems relating to these issues requires a detailed understanding of the nature of the business. This includes close monitoring through relevant experts who are able to analyse the issues and then propose feasible solutions. The costs associated with such an exercise would normally be prohibitive, although the costs may be mitigated through some kind of collective action by financial institutions.

Not all forms of intervention in the affairs of a company, however, need be costly. Where, for example, there are corporate governance issues to be addressed, such as a failure to adhere to the recommendations of the UK Corporate Governance Code, a financial institution may nominate individuals for appointment as non-executive directors who can be relied upon to see that necessary changes are made. This should involve relatively little cost for the financial institution.

The future of shareholder activism

The rise of shareholder activism raises two important questions that have yet to be answered. Firstly, is it just a passing phenomenon? It is no coincidence that shareholder activism took root during a period when stock market returns were fairly low.

There is a risk that financial institutions will become less active and less vigilant in monitoring companies when stock market returns improve. Secondly, does shareholder activism really make a difference to corporate performance? The research on this matter so far has been quite sparse but early research in the US is not encouraging for those who urge financial institutions to take a more active approach. We may have to wait some while, however, for clear answers to these questions.

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