Wake up, India Inc

Companies should learn to deal with shareholder activism

It’s been a busy season for shareholder activism in India Inc. While the Zee-Invesco slugfest has been in the spotlight, there have been many other side actors too of equal significance. In the last couple of months, the boards of as many as six companies got a taste of such activism in varying degrees — while Zee has refused to hold an extraordinary general meeting to consider replacement of the promoter and certain directors as demanded by Invesco, which holds an 18 per cent stake, YES Bank, which owns almost 25 per cent in Dish TV, has asked for removing the latter’s board on the grounds that it is purportedly acting at the behest of certain minority shareholders, who have just a 6 per cent stake.

Less than two weeks ago, the shareholders of IDFC rejected the reappointment of Vinod Rai as non-independent and non-executive director. And then there were two instances of shareholder angst over executive remuneration — they voted against Eicher and Balaji Telefilms’ decision to increase the salaries of their top executives. Reliance Industries has also felt the heat, with the second-largest pension fund in the US deciding to vote against the company’s proposal to appoint Saudi oil producer Aramco’s chairman as an independent director. The fund has cited potential conflict of interest, as the company plans to sell a 20 per cent stake for $15 billion to Aramco. India Inc has been seeing such shareholder activism over the past few years (Apollo Tyres, CG Power, Fortis, etc) but they have been sporadic at best until two months ago.

This change bodes well for a healthy corporate democracy though most companies still lament the drain on time that such activism entails and blame it on vested interests who are simply peddling a short-term agenda. That view is understandable in a country where controlling shareholders, or promoters, dominate the corporate landscape. But India Inc should read the tea leaves fast. There are several reasons why they should do so — in most of these cases share prices have surged after the pushback from shareholders, signalling the governance discount the markets had assigned to these companies. One of the main reasons for the spurt in such activism is the gradual rise in the shareholding of institutional investors in BSE 500 companies from 25 per cent to 35 per cent over the last decade. Besides, prudent regulatory interventions have helped, but more effort still needs to be made to enhance the power of minority shareholders, who are compelled to act in the shadow of majority shareholders. Proxy advisory firms have played a stellar role too despite criticism over a lack of transparency around how they make their recommendations.

The encouraging trends in shareholder activism should, however, not mask the basic truth that a large part of India Inc is taking baby steps towards dealing with shareholders, who are no longer content with playing just a passive role. This new breed of shareholders does not shy away from scrutinising company performance, and agitate for a strategic turnaround or other value-creating event. Several studies across many countries show that these activist shareholders have brought in financial discipline and purged management excesses in corporations. In several countries, shareholder activists have gone a step further by playing a constructive role in making companies aware of economic and social governance and long-term sustainability by linking it with investor interest. This trend is likely to catch up in India too.