Shareholder Activism

Banu Dandona

What is shareholder activism

Shareholder activism refers to the active involvement of stockholders in their organization.

An activist shareholder uses an equity stake in a corporation to put public pressure on its management.

Shareholder activism means

Establishing dialogue with the management on issues that concern

Influencing the corporate culture. Using the corporate democracy provided by

law. Increasing general awareness on social and

human rights issues concerning the organization.

Two broad categories of shareholders Dominant shareholder/ majority shareholder i.e one

who holds more than half of a company’s shares. This could include promoters holding a block of shares together with their relatives and friends

Minority Shareholders : of a firm who does not have the voting control of the firm, by virtue of his or her below fifty percent ownership of the firm's equity capital.

Rights of Minority Shareholders

Minority shareholders have played a largely passive role in public companies

Therefore perceived as having far less power to set corporate policy than directors and officers have.

Shareholder activism trigger

Recent developments in the financial markets, in business practices, and in corporate law, minority shareholders are finding it economically rational to try to influence corporate decision making. 

A number of prominent institutional investors, including both mutual funds and pension funds like CalPERS, have emerged as activist investors

Shareholder activism can be exercised through

proxy battles publicity campaigns shareholder resolutions litigation and negotiations with management

Shareholder activism and apartheid Socially Responsible Investment Committee

of the Episcopal Church filed one of the first-ever shareholder resolutions. 

It asked GM to get out of apartheid South Africa, an appeal that set in motion a long chain of events that ultimately ended in the abolition of apartheid in South Africa, a nation then enforcing a very strict apartheid, including total separation by race in the workplace .

Shareholder activism and apartheid This created a modus vivendi within the General

Motors Board to reform what they were doing in South Africa, as opposed to leaving the country altogether. 

In order to make it more palatable, they formed a coalition of American companies with the same goals, and virtually all of the larger US firms, including Ford and Goodyear, signed on to the Sullivan  principles to reform their own workplaces.

Shareholder Activism in India In India proxy advisory firms like InGovern started by

Mohandas Pai is the India’s first independent proxy advisory firm. InGovern assists institutional investors that have financial or reputation exposure to public companies.

http://www.ingovern.com/wp-content/uploads/2012/03/Governance-Watch-March-2012.pdf

Institutional Investors Advisory Services (IIAS), floated by Anil Singhvi and Amit Tandon, is an advisory firm dedicated to providing participants in the Indian market with independent opinions, research and data on corporate governance issues.

The case of Coal India

The Supply of Coal in India is as per new Coal Distribution Policy (NCDP)

Coal supplies are governed by Legally enforceable agreements between the seller (coal companies) and the consumer under specific terms and conditions.

Its administrative ministry, i.e. Ministry of Coal decides as to the supply and pricing of coal.

Coal India Limited

Coal India is a company listed on the India bourses. It was listed in November 2010.

The Children's Investment Fund, the largest FII investing into Coal India holding 2 % stake wrote to the management regarding issues on corporate governance.

Coal India Limited

TCI accused the CIL board of breaching its fiduciary duties by failing to stand up for the interests of the company.

TCI, has commenced legal action against the Government of India over its investment in Coal India, arguing that the matter had far wider corporate governance implications for India.

The coal ministry has recently written to TCI pointing out that the pricing structure and government's control over it was clearly mentioned as "risk factors" in the company's prospectus for the IPO.

The ministry argued that coal prices have been kept low to ensure cheaper power to people.

It has also said CIL is making profits even after selling at government-controlled prices.

Coal India Limited

Independent directors on the board of Coal India Ltd (CIL) have blocked a proposal to sign 20-year fuel supply agreements (FSAs) with power producers that involved a guarantee to supply at least 80 per cent of the commitment under government orders.

The level of minimum supply guarantee would not be fair to the company since fulfilling the minimum supply condition was a near impossibility.

In a rare move, the government has armed itself with a presidential directive that it could use to force Coal India Ltd (CIL) to sign fuel supply agreements (FSAs) with power producers, potentially binding the state-owned miner to supply as much as 80% of the fuel requirements of power plants or pay penalties if it doesn’t meet the commitment.

To meet the commitment Coal India might have to import coal.

Coal India

As per the media reports, the need for such a directive seems to have arisen in the light of resistance from independent directors on CIL’s board to signing FSAs guaranteeing fuel supply to power producers, he said.

The issue with regard to signing the Fuel Supply Agreement will be deliberated at its Board Meeting on April 16, 2012

Some issues

Have Foreign Institutional Investors heralded a new wave of shareholder activism in India?

Why did the independent directors of CIL not raise their voice earlier?

Do we need a better CG Model for PSUs?

Thank You

Disclaimer Clause: Views expressed in this presentation views of the author do not necessary reflect those of the Institute.