Rise of Activist Shareholders and their Battles with the Boards of Companies

The Emergence and Rise of Activist Shareholders

In recent years, there have been a series of battles between what are known as Activist Shareholders and the Boards of Companies. These battles which are usually about corporate governance and the direction and strategies of the companies have often been bitter and acrimonious.

So, who are Activist Shareholders and what do they want? An activist shareholder is one who has significant stakes in the companies though, not to the extent that they can sit on the board, but very interested in the running of the companies in which they are shareholders.

Indeed, the emergence of activist shareholders means that boards and companies are under increasing pressure to clean up their act and improve transparency and accountability in corporate governance.

What do the Activist Shareholders Do?

Much like the activists who demand answers from the governments in matters of governance, the activist shareholders, as their name implies have the aim of throwing light on the dark places of corporate governance and other aspects. Given the fact that corporate governance is usually questioned and monitored by the board members, the rise of external shareholders who are not part of the boards but hold enough stake to demand a general meeting of shareholders or for that matter.

Also, they often force voting on the performance and strategies of the companies so that there is more accountability means that the boards can no longer take for granted the shareholders who are in a minority since they can muster enough shareholders to their cause.

Some Real-World Examples

While multinationals such as Proctor and Gamble have warded off the threat from activist shareholders in recent months, firms such as the Indian IT (Information Technology) behemoth, Infosys, have not been so lucky wherein the founders such as Narayana Murthy, and others ensured that they had their way when demanding answers from the boards.

It is also the case that sometimes the boards and other shareholders such as Institutional Investors often prevail over the activist shareholders so that the companies return to a Business as Usual state which is what happened ultimately with Infosys.

Thus, while activist shareholders do hold and wield significant power, the brute logic of patterns of shareholding ensures that other shareholders often have the last word since the former do not have enough votes to ensure that their motions are passed in the general meetings of companies with their shareholders.

How Activist Shareholders Help Corporate Governance

However, this does not mean that activist shareholders are just a nuisance who can eventually be brushed aside since they do not have the comfort of numbers.

Indeed, if not anything, activist shareholders have brought a whiff of fresh air into the otherwise staid world of corporate governance due to their insistence on questioning the practices of companies and their dogged pursuit of the causes that they hold dear.

Much in the manner of crusaders for justice, the activist shareholders pursue the companies and ensure that, if not anything, their demands are given a hearing and that they are brought to the notice of the media and the other shareholders as well as the public at large.

Indeed, the fact that the questions and issues raised by the activist shareholders usually garner the attention of the media and the public is one reason most companies are afraid or unwilling to drown their voices.

Given the fact that regulators too might jump into the fray and ensure that whatever issues that the activist shareholders are raising are addressed, most boards are wary of them, and usually, the safe play is to call for a general meeting and have voting so that everyone and all the stakeholders are aware of the issues and the responses to them from the boards.

When Activist Shareholders Succeed

Having said that, it must also be noted that activist shareholders do sometimes succeed especially when the issues and questions raised by them are serious in nature that the other shareholders too are uncomfortable with such issues.

Indeed, if not anything, activist shareholders ensure that corporate governance is not opaque or clubby meaning that outside of the select circle of the board members and other significant shareholders, everyone else is unaware of the exact details surrounding corporate governance.

This means that activist shareholders and their championing of causes lead to a more democratic way of corporate governance wherein the rules are followed and any lapses, become hard to cover up or brush under the carpet.

For instance, some firms in the United States had to address the issues and admit their mistakes when responding to the problems arising from poor corporate governance.

This has also resulted in the wider public and media coming to know about such problems and acting on them which is a form of democracy at work. Thus, one can say that activist shareholders have a vital role to play in ensuring good corporate governance.

Activist Shareholders make Corporate Governance Democratic

Lastly, the emergence and the rise of activist shareholders have coincided with the ever concentrating power of the boards which anyway does not augur well for the future of corporate governance.

Thus, it is our view that as long as the activist shareholders do not chase frivolous issues or personal agendas, they can be a force for good in the corporate setups in the same manner in which public and social activists often force the governments to acknowledge and address the problems rather than just pretending that they do not exist or diverting attention from them.

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Corporate Governance