Shareholder Activism is a way in which shareholders can influence a company’s behavior by exercising their rights as owners (Investopedia). Financial Times defines Shareholder Activism as “the idea that investors should work to influence the running of the companies in which they invest, primarily through the casting of shareholder voting. This activity is designed to deter poor governance that might pose a long-term threat to the profitability of the companies that shareholders invest in”. Shareholder activism is not the prerogative of minority shareholders as it can involve institutional investors (mutual funds, pension funds, banks, private equity investors, etc) and shareholder associations.
Activism covers a range of activities and includes “voting with one’s feet” (divesting), private discussions or public communication with the Board of Directors and Management, press campaigns, whistle blowing to regulators, active participation at general meetings, seeking to replace individual directors or the entire board, etc. Unresolved issues between shareholders and the Board (and Management) have the potential to detract from the operations of the company.
Attitudes to overly vocal shareholders tend to range from ambivalence to irritation. However, it is possible for shareholder activism to be used as an effective tool for ensuring sound corporate governance. Many institutional investors tend to be passive “gate-keepers” and have allowed Shareholder Associations to take the front seat at general meetings. In the wake of corporate governance scandals that witnessed substantial erosion of investment globally, institutional investors should take more interest in the affairs of the companies in which they have invested.
A common complaint of shareholders is that the Annual General Meeting (AGM) is the only opportunity they have to interact with the Directors and Management and to air their views on the affairs of the company. It is recommended that the Board and Management should organize additional avenues to engage shareholders, whilst being mindful of corporate governance considerations on granting preferential treatment to shareholders.
In Nigeria, “shareholder activism” can be said to be a euphemism for disruptive, uninformed, populist “rabble-rousing” at Annual General Meetings and in its extreme form, is perceived as an extortion scheme. However, it can be argued that companies with active and engaged shareholders are more likely to uphold good corporate governance practices and ultimately be more successful in the long term than those that are left to do as they choose. Thus, shareholder actions (not antics) could be potentially powerful in ensuring the enthronement and practice of sound corporate governance.
Shareholder activism is in a sense an obligation imposed upon shareholders of public companies, as the SEC Code of Corporate Governance mandates them to “play a key role in good corporate governance”. In particular, institutional shareholders are obliged to “seek to influence positively the standard of corporate governance in the companies in which they invest”. Indeed, there is a SEC Code of Conduct for shareholders made pursuant to Section 8(y) of the Investments and Securities Act (ISA) 1999 that seeks to guide the conduct of members of Shareholders’ Associations during general meetings of public companies and their relationship with public companies outside the general meetings. The Code is intended to ensure the highest standard of conduct amongst members of Shareholder Association and to ensure that shareholders make positive contributions in ensuring that the affairs of public companies are run in an ethical and transparent manner and also in compliance with the Code of Corporate Governance for public companies.
Institutional investors hold significant stake in most of the companies listed on the Nigerian Stock Exchange. They are in a position to positively influence the efficient governance of their investee companies and given their significant stake, ought to have an incentive to take a more active role in monitoring corporate misconduct. To a large extent, they have been content to take a passive approach to their investment or simply sell the shares of underperforming companies. There is need for more activism on the part of institutional investors, as the Shareholder Associations are too fragmented and usually ineffective in influencing corporate behavior. Shareholder Associations on the other hand need to equip themselves to be positioned to monitor and assess the wellbeing companies such that their intervention will be more structured and value adding.