INTRODUCTION
Decisions about mergers, executive compensation, sustainability and even governance used to be made behind closed doors in corporate boardrooms. Shareholders, the rightful owners of the company, were merely seen as passive recipients of dividends while watching the corporation act from a distance. However, this is changing. Around the world and in India, investors are demanding a seat at the table. In fact, in the last decade, what was once rare, shareholder activism, has transformed into a force that is changing how Indian companies conduct business.[1]
WHAT IS SHAREHOLDER ACTIVISM?
Shareholder activism, in its most basic sense, is when shareholders attempt to influence the corporation’s decision-making processes.[2] The corporation’s shareholders can engage in activism by demanding corporate governance improvements, oppose mergers, question executive compensation policies, and promote environmental and social responsibility.[3] Shareholder activism can come from external authors or activist shareholders because activist shareholders see themselves as custodians for corporate accountability, in contrast to passive investors who are simply satisfied receiving a yield from their capital contributions.[4]
While this has been ingrained in markets such as the United States and the United Kingdom, where hedge funds and institutional investors engage in activism to change boards or strategies, India is not as far along the curve but is making progress. However, the increasing majority ownership by institutions, in addition to regulatory scrutiny and the awareness of investors, is changing that silence.[5]
THE INDIAN CONTEXT: FROM PASSIVITY TO PARTICIPATION
The emergence of shareholder activism in India parallels the changing structure of Indian corporations. For decades, the corporate culture in India has been dominated by family-owned businesses and promoters. Minority shareholders who were discontent did not have the legal means or confidence to contest the promoter’s control.
The Companies Act of 2013 and SEBI’s Listing Obligations and Disclosure Requirements (2015) introduced reforms that began to change the investor-management dynamic. The law improved shareholder rights by establishing a greater requirement for transparency and independent directors and allowing shareholders to vote on resolutions electronically.[6] With the potential emergence of institutional investors such as mutual funds, insurance companies, and foreign portfolio investors, scrutiny of corporate governance increased.[7]
The mid-2010s also marked a significant watershed moment, from the Tata-Mistry case to many shareholders of Infosys questioning executive pay when it became evident that shareholders could influence significant corporate decision-making.[8]
KEY EPISODES OF THE REIMAGINATION OF ACTIVISM IN INDIA
One of the most significant instances of shareholder activism in corporate governance was undoubtedly the Tata Sons vs. Cyrus Mistry case (2016). The dispute commenced in 2016, shortly after the board removed Mistry as Chairman of Tata Sons, and opened up discussions related to board independence, corporate governance, and shareholder rights.[9] Although this case was domestic in nature, being an internal dispute within a corporate conglomerate, it sparked a national conversation on whether the board has long served to serve all shareholders and not just Promoter interests.
An additional significant occurrence was the particular development in Infosys, in which its founder Narayana Murthy expressed his concerns about corporate governance and executive pay during the tenure of the then-CEO Vishal Sikka.[10] He was not a principal shareholder. Nevertheless, upon expressing his concerns, he and other investors essentially pressured management to communicate more openly with shareholders about their plans. The event highlighted that by organizing themselves and speaking up, even minority shareholders can influence corporate policymaking.[11]
MOTIVATIONS IN INCREASING INTEREST
This shift has been motivated by several factors. First and foremost, the legal framework provides shareholders with more authority than ever before. The Companies Act of 2013 includes greater disclosure, voting rights for shareholders, and the ability to seek a resolution.[12] In addition, the SEBI (Listing Obligations and Disclosure Requirements) Regulations of 2015 require listed companies to provide even more transparency and accountability.[13]
Secondly, technology and electronic voting have altered how investors can participate. Previously, attending a shareholder meeting in person was in most cases impossible, but through electronic voting systems, shareholders can now influence decisions from across the country and sometimes from overseas.[14]
Thirdly, the rise of ESG (Environmental, Social, and Governance) awareness has changed the purpose of activism. Today, shareholders are interested in other things besides profit. Shareholders think about sustainability, ethical principles, and social responsibility. This concern spurred a new form of activism that seeks to harness corporate success with social purpose and impact.[15]
Finally, the media and market watchdogs have elevated shareholder voices. Coverage of conflicts in governance can sometimes pressure companies to behave more responsibly. The maturation of the legal and regulatory framework around India’s markets means that even shareholder dissent cannot simply be ignored anymore.[16]
EMPOWERING INVESTORS: THE UPSIDE
The upside of all this is that shareholder activism has generally improved the nature of corporate democracy.[17] Shareholder activism gave investors, whether they be institutional or retail, a legitimate role in corporate decision making. Activist shareholders have pushed companies to adopt stronger governance principles, develop disclosures, and improve accountability.[18]
Institutional activism in particular has produced greater corporate accountability and has facilitated greater corporate accountability.[19] Mutual funds, international investors and pension funds are pooling their voting power to influence decisions and promote a balance between ownership and control.[20] Many local corporate managements no longer wait for conflicts to develop but proactively engage with their equity holders.[21] Each party appears to benefit, as constructive activism fosters cooperation rather than confrontation. Activism also increases a focus on future value creation.[22]
THE FLIP SIDE: WHEN ACTIVISM DISRUPTIVE
To be sure, shareholder activism has negative aspects. If activist incidents result in tensions, critics often contend that activism may disrupt management to put more attention on short-term initiatives.[23] In some cases, activist initiatives may be focused on short-term goals, advance given personal interests, maximize competitive advantage, or produce immediate earnings.[24]
Frequent public disagreements, such as the Tata-Mistry matter, can erode investor trust, harm brand reputation, and divert management’s attention away from business priorities.[25] In addition, activism may also lead management teams to become risk-averse because of shareholder backlash from angry and vocal investors.[26]
Another concern is the low participation rate among retail investors.[27] While institutional investors have become active, individual investors are often limited in their ability or resources, knowledge, and cohesion to effectively participate. As a result, we have a paradigm of “activism inequality,” where only large investors can effectively participate.[28]
THE ROAD AHEAD: STRIKING THE RIGHT BALANCE
The challenge for Indian corporate law and governance is to strike the right balance.[29] On the one hand, investor governance must encourage participation, while on the other, it can’t compromise management from making independent decisions. Activism must continue to be a positive force; therefore, it has to be constructive by ensuring that any contemplated action is thoughtful, a product of disclosure, and ethical, rather than merely focused on the competitiveness of being opposed to management in a promotional fashion.[30]
In the future, organizations ought to create an environment where communication proactively flows.[31] Providing transparent disclosures, having scheduled engagements with investors, and being timely in addressing them will stave off most potential conflicts. The board should view activism as an opportunity for feedback reflecting new expectations of stakeholders, not as a risk.[32]
For shareholders, behavior toward an activist role should be responsible and fully premise on research. Constructive criticism, asking for information that the data supports, and honoring corporate strategy will bolster the credibility of shareholders and increase the impact of potential actions.[33] Regulators must balance protecting shareholder rights with methods to keep it from being misused.[34]
It is also interesting and notable that sustainability as a topic and digitalization of activism are changing what activism looks like going forward.[35] Expect more “digital activism,” where investors compact action using social media (the last 2 years is a great example) and “ESG activism,” where climate and social issues increasingly catch the attention of corporations in the future.[36] The Indian legal system will need to evolve to respond to that risk.[37]
CONCLUSION: FROM CONFRONTATION TO COLLABORATION
While shareholder activism has surfaced in the Indian economic system, it highlights that corporate governance standards in India are growing up.[38] It jeopardizes a society that is increasingly educated, concerned and engaged where investors have zero tolerance for examining issues closely (that may even risk shareholder value). Whether it is in examining whether ex-executive compensation is unfair, calling for a strict set of ethical principles in governance, or examining deals they think are unclear or dishonest, there is no doubt that activism provides a better degree of corporate accountability.[39]
However, like any tool with power, its effectiveness is determined by the way the tool is used. Activism may lead to a more transparent, accountable, and sustainable corporate India when sponsored by principles and a long-term view.[40] But if motivated by short-term self-interest or personal animus, activism can threaten management stability and undermine the company it seeks to help.[41]
Author(s) Name: Ananya Yadav (UILS, Chandigarh University, Mohali (Punjab))
References:
[1] Vivek Bhandari and Anil Arora, ‘Influence of Shareholders’ Activism and Firm-Level Variables on the Corporate Governance Quality in India’ (2016) Indian Journal of Corporate Governance https://discovery.researcher.life/article/influence-of-shareholders-activism-and-firmlevel-variables-on-the-corporate-governance-quality-in-india/b7c094b6683c3e92bf21b0e74ec54201
[2] Vishal Baloria, Catherine Wiedman and Kenneth Klassen, ‘Shareholder Activism and Voluntary Disclosure Initiation: The Case of Political Spending’ (2019) Contemporary Accounting Research https://discovery.researcher.life/article/shareholder-activism-and-voluntary-disclosure-initiation-the-case-of-political-spending/d1dd996c85fc329da958d2ec997008aa
[3] Peter Velte, ‘Institutional Ownership, ESG Performance and Disclosure – A Review on Empirical Quantitative Research’ (2020) Problems and Perspectives in Management https://discovery.researcher.life/article/institutional-ownership-environmental-social-and-governance-performance-and-disclosure-a-review-on-empirical-quantitative-research/531fd3d817da34e898ae7e3d0a312b3c
[4] Robert Benton, ‘The Decline of Social Entrenchment: Social Network Cohesion and Board Responsiveness to Shareholder Activism’ (2017) Organisation Science https://discovery.researcher.life/article/the-decline-of-social-entrenchment-social-network-cohesion-and-board-responsiveness-to-shareholder-activism/9f75b2c6f1e930d295d9d8338dbf6548
[5] Bhandari and Arora (n 1).
[6] Ibid.
[7] Ibid.
[8] Ibid.
[9] Ibid.
[10] Ibid.
[11] Ibid.
[12] The Companies Act 2013 (India), ss 92, 100, 108, 110, 188, 241–246.
[13] Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations 2015, regs 4, 27, 30, 34.
[14] Ministry of Corporate Affairs, Companies (Management and Administration) Rules 2014, rule 20 (as amended by Companies (Management and Administration) Amendment Rules 2015).
[15] Securities and Exchange Board of India, Business Responsibility and Sustainability Reporting by Listed Entities (Circular SEBI/HO/CFD/CMD-2/P/CIR/2021/562, 10 May 2021).
[16] Securities and Exchange Board of India, Consultation Paper on Review of Disclosure Requirements for Material Events or Information (2023); Press Trust of India, ‘Shareholder Activism in India: A New Era of Accountability’ The Hindu Business Line (Chennai, 12 August 2022).
[17] Umakanth Varottil, ‘Shareholder Activism in India: Evolution, Prospects and Challenges’ (2012) 6 NUS Law Working Paper Series 1.
[18] Securities and Exchange Board of India, Report of the Committee on Corporate Governance (2017) (Chair: Uday Kotak).
[19] Umakanth Varottil, ‘Institutional Investors and Corporate Governance in India’ (2015) 7(1) Journal of Corporate Law Studies 1.
[20] Organisation for Economic Co-operation and Development (OECD), Principles of Corporate Governance (2015).
[21] Somasekhar Sundaresan, ‘Shareholder Activism in India: The Changing Face of Corporate Governance’ (2018) Business Standard (Mumbai, 23 June 2018).
[22] R Varottil, ‘Constructive Activism and Corporate Value Creation’ (2019) Indian Journal of Corporate Law 4.
[23] Alon Brav and Wei Jiang, ‘Shareholder Activism and Corporate Short-Termism’ (2018) 31 Quarterly Journal of Finance 15.
[24] Lucian Bebchuk, Alon Brav and Wei Jiang, ‘The Long-Term Effects of Hedge Fund Activism’ (2015) 115 Columbia Law Review 1085.
[25] Cyrus Investments Pvt Ltd v Tata Sons Ltd [2019] SCC OnLine NCLAT 9.
[26] SEBI, Consultation Paper on Review of Disclosure Requirements for Material Events or Information (2023).
[27] SEBI, Report of the Committee on Fair Market Conduct (2018).
[28] Sandeep Parekh, ‘Retail Investors and Activism Inequality in India’ (2020) Economic Times (New Delhi, 14 October 2020).
[29] Ministry of Corporate Affairs, Report of the Committee to Review Offences under the Companies Act 2013 (2019).
[30] SEBI, Business Responsibility and Sustainability Reporting by Listed Entities (Circular SEBI/HO/CFD/CMD-2/P/CIR/2021/562, 10 May 2021).
[31] R Vaish, ‘Strengthening Shareholder Engagement in India’ (2022) Journal of Governance and Regulation 11(3) 45.
[32] OECD (n 4).
[33] Umakanth Varottil (n 1).
[34] Ministry of Corporate Affairs, National Guidelines on Responsible Business Conduct (2019).
[35] SEBI, Consultation Paper on ESG Disclosures, Ratings and Investing (2021).
[36] Priya Balasubramanian, ‘Digital Shareholder Activism: The Next Frontier’ (2023) Harvard Business Law Review Online.
[37] Ministry of Corporate Affairs, Report on Digital Governance and Corporate Compliance (2022).
[38] R K Bansal, ‘Shareholder Activism and Corporate Governance in India’ (2021) International Journal of Law and Management 63(4) 322.
[39] SEBI (n 10).
[40] OECD (n 4).
[41] Bebchuk, Brav and Jiang (n 8).
