Shareholder activism refers to actions by large shareholders, both institutions and individuals, to protect their interests when they feel that managerial actions diverge from shareholder value maximization. Activist shareholders make use of their stake in public listed firms to pressurize its management. The aim is to initiate changes in corporate policy and at its most extreme, to bring about change of the entire management itself. There are many ways in which shareholders can exert their influence. They include voting at the annual general meeting, having dialogues, making proposals to top management or even suing the management of a firm.
Shareholder activism is a relatively recent occurrence and its rise has been attributed to three main causes. Firstly, high concentration of ownership by institutional investors, especially pension funds that need to safeguard their investments causes shareholders to be more aggressive in voicing their grievances. This is related to the second factor, which is the enactment of legislature that stipulates fiduciary responsibility for pension funds. Finally, there is a proliferation of antitakeover activities for large companies.
The economic motive behind shareholder activism is the most apparent. In the past, it was argued that if the investor was dissatisfied with the financial performance of a firm, the investor could simply sell of the shares in the firm and invest elsewhere. It was generally held that moving beyond the traditional role of stockholders, which is to monitor stock price movements to actively manage the decision making process is too expensive when compared with the rate of return (Bainbridge, 1995). However, with changes in the regulatory framework (which will be explained in later paragraphs) have enable activist shareholders to pool their resources and act in more cost effective ways. Furthermore, the spillover effects of improved corporate performance as a result of shareholder activism have the effect of offsetting the costs of activism.
The growth in shareholder activism would not have been possible without changes in the political and legal climate. In the UK for instance, the election of Tony Blair in 1997 witnessed an era of great economic prosperity. At the same time, there was a growing public debate on executive remuneration, dubbed 'fat cat' pay. It was felt that top management was being paid too much and there was no punishment for failure as remuneration seemed unaffected by plummeting stock prices. As a result, the UK government stressed the importance of accountability by companies to their stockholders and passed legislature that required remuneration reports to be subject to a vote at the annual general meeting. As a result, there were more opportunities for activist shareholders do get more involved.
While shareholder activism by individuals can occur, it is the institutional investor that is highlighted. Indeed, research as shown that in the US alone, the share of ownership in large corporations had increased from 46.6% in 1987 to an astounding 76.4% in 2007. Yet, it seems, institutional investors have been largely passive, but signs show that this is changing. The initial lack of shareholder activism can be due to the regulations and restrictions imposed on institutional investors by governments. Other factors include agency and information costs and limited competence to undertake shareholder activism.
However, institutional investors are beginning to flex their muscles and play a more significant role in corporate governance. Many institutional investors are aggressive in protecting and enhancing their investments. In effect, they are shifting from traders to owners. They are assuming the role of permanent shareholders and rigorously analyzing issues of corporate governance. In the process, they are reinventing systems of corporate monitoring and accountability.
It is anticipated that shareholder activism will continue and increase in the years to come. One of the factors that contribute to this is increasing public and political support for shareholder rights and influences. The spate of corporate scandals around the world demonstrate that management does not always act in the best interest of shareholders and that active monitoring is important to ensure that the management discharges its fiduciary duty. In addition, shareholders and the public are questioning the hefty remuneration packages of top executives. In the past, the rational behind paying astronomical sums for top management was that it was the way to attract the best and brightest. Yet, many of the so-called "best and brightest" executives acted recklessly in self-serving ways and did not contribute in any meaningful way to maximizing shareholder wealth. On the contrary, some acted in ways that were detrimental and led to wealth destruction. Shareholders are fed up with top management and demand far greater accountability.
Another reason that has led to increased shareholder activism is the changing regulatory framework that favours shareholder activism. For instance, e-proxy rules reduce the cost of proxy solicitation and electronic forums for shareholders allow communication without compliance with proxy rules. Some countries have amended their laws regarding proxy access and reimbursement. In the US, the SEC has come up with rules on proxy access and disclosure. The SEC has also enacted additional legislation, among the abolishing discretionary voting in elections for directors. Other proposed regulations concern executive compensation, director qualification and proxy solicitation. Underperforming companies will be particularly vulnerable as activist shareholders will unfavourably compare their performance to those of peers and demand changes.
An increase in shareholder activism will also witness a proliferation of shareholder proposals. By laws are being amended to permit proxy access. Shareholders will demand greater transparency and performance linked executive remuneration packages. There may also be declassification of board information so that they can be scrutinized by unhappy shareholders. Currently, in most large corporations, the Chairman and the CEO are the same individual. New developments mandate that there must be separation and that these two positions must be held by different individuals to avoid conflict of interest.
Currently, many board members are appointed by the CEO and the sole criterion is often unwavering loyalty and subservience to the CEO. Hence, the board goes along with whatever the CEO decides and there is no dissent or critical evaluation of the situation. This is bad for the corporation. Increased shareholder activism will soon make it necessary for a majority vote for the election of directors. Shareholders will also exercise their right to call for special meetings to address pressing issues that are of concern to them. We may also see the elimination of super majority voting as if more people get involved in the voting process, if may be harder to have large victory margins. Furthermore, shareholder activism will mean that companies will have to show greater corporate social responsibility.
When shareholders are emboldened and realize they actually have greater power, they will have more expectations. For one, activist shareholders will demand meetings with directors to address their grievances. They will also demand greater communication between shareholders and directors. Directors can no longer hide behind the wall of inaccessibility but may have to confront activist shareholders head on. With additional expectations comes more proxy contest, some of which may be ugly and acrimonious. Shareholders may display their unhappiness through spoilt or withheld votes to deny the board a clear cut victory over some decisions. Activist shareholders may resort to the media to air their grievances, as there are many channels now. They may employ online social networking channels like Facebook or Twitter, or they may use more traditional approaches like press conferences. Either way, activist shareholders will play a more prominent role and management cannot turn their back on them. Finally, if all else fails, activist shareholders will use the courts to try and get what they want. We will witness a rise in lawsuits for breach of fiduciary duties and other related issues.
Shareholder activism in relation to remuneration policies is a positive move in the right direction. As mentioned earlier, executive remuneration has increased exorbitantly in the past ten years or so, ostensibly to attract the best and brightest who will steer the corporation to greater heights. This has led to a staggering disparity in income between the average worker and CEO, which would not be as enraging if executives really served the best interest of the firm. Instead, many of them have performed poorly and cannot justify the salaries they receive. One good example is Tony Hayward, the former CEO of British Petroleum who was directly responsible for the massive oil leak off the Gulf of Mexico. Despite only leaving after the board of directors elected to remove him, Hayward received a severance package of around GBP11 million. Similarly, many top executives of insurance companies and banks who caused the financial crisis in 2008 all rewarded themselves with hefty bonuses. In instances like these, shareholder activism on remuneration policies would have prevented these executives from getting away unscathed. The severance and remuneration of these top executives should have been drastically curtailed to punish them for their actions and to warn future management against acting in an unethical manner.
While it is good that shareholders are beginning to show greater awareness and concern, too much shareholder activism may not be a good thing. For one, it may hamper the decision making process. Activist shareholders may not be the most intelligent and have the best ideas on how to make the corporation succeed. They may act on personal convictions and biases. For example, an activist shareholder may oppose certain business diversification ideas because it contradicts their religious beliefs. They may go all out to quash the decision and tarnish the reputation of management. In the end, the corporation may have foregone an excellent business opportunity all for the sake of appeasing a few large shareholders. If shareholder activism gets too powerful, management may become excessively cautious and not take the calculated risks necessary to maximize shareholder wealth.
Activist shareholders may overstep their boundaries. After all, one of the features of a corporation is the separation of owners and control. By playing a too proactive role, the stockholder may abrogate the role of being a mere owner and exercise control as well. Of course it may be argued that top executives get stock options so they are having conflicting interests as well. However, in their case, they are supposedly trained and capable of running a company and the stock option serves as an incentive. On the other hand, activist shareholders may have never run a company and do not know the problems involved. Their constant threats and actions effectively put a millstone around the management's neck and constant conflicts mean that major issues may never be satisfactorily resolved. While the solution may be to replace the board with a new one, constantly meddling shareholders may result in a high board turnover and no real continuity of ideas. Instead of preserving their wealth, activist shareholders may cause a decline in stock price and dividends through foolish and unnecessary actions.
In conclusion, there are many forms of shareholder activism. Some are essential as in the case of monitoring the remuneration package of executives. This form of activism demand greater responsibility and accountability. In other words, shareholders should get their money's worth when paying executives high salaries. At the same time, other forms of activism should not be encouraged too much as they could result in meddling in the management of firms.
