A step towards improving corporate governance


Shareholder activism involves the efforts of shareholders to bring about a desired change in the way the business operates. While most mature markets have powerful militant shareholders fighting for the rights of minority shareholders, Indian minority shareholders struggle to make their voices heard.

The oldest (and grossest) form of shareholder activism first appeared in the United States, with the rise of corporate raiders. These raiders emerged as a counter-force in the 1970s, when the leadership ruled conglomerates as their personal strongholds.

These directions were often pampered with huge salaries and comfortable retirement allowances (golden parachutes). While some corporate raiders simply threatened management with buyouts and forced the companies to buy back their shares, others took full control of the company and focused on creating a leaner structure.

Over time, these raiders managed to shake off the “raider” label (with considerable public relations effort) and created an image of an activist shareholder. Despite the criticism addressed to them, several studies show that these militant shareholders have established financial discipline and purged the managerial excesses of American companies.

Recently, the question of shareholder activism arose when the 10 percent salary hike for Eicher Motors’ Managing Director and CEO Siddhartha Lal encountered opposition from others. shareholders.

The company’s revenue increased from Rs. 8,965 crore in fiscal 2018 to Rs. 8,720 crore in fiscal 2021. Operating margins also increased by 31% in fiscal year 2018. ‘fiscal year 2018 to 20% in fiscal year 21.

The shareholder pullback came amid criticism from several automakers whose management had taken pay increases despite being hit by the pandemic.

Other automakers have also faced similar issues recently. For example, Hero MotoCorp is struggling to increase revenue. Sales fell from Rs. 32,458 crore in 2018 to Rs. 30,959 crore in 2021.

Still, promoter and managing director Pawan Munjal will earn a salary of Rs 95 crore in FY 22, a 10 percent increase.

In addition, Hero MotoCorp also purchases raw materials from companies in the promoters’ group. The resolution on the salary increase passed with a 60 percent approval rating, with 78 percent of institutions voting against the resolution.

In 2018, Neeraj Kanwar, promoter and CEO of Apollo Tires, faced the wrath of shareholders after continuously increasing his salary, despite the faltering performance of the company.

Minority shareholders voted against the increase and management was forced to lower their compensation.

But shareholder activism in India has been relatively rare. Most of the listed companies in India are run by families of promoters. These families hold a majority stake and control the operations.

The promoter’s strong shareholder base helps controversial resolutions go through without a hitch.

In contrast, most US-based companies do not have owner-operators. The absence of a majority shareholder makes it easier for shareholders with small holdings to make desired changes to the business.

Probably the only episode of shareholder activism unleashing real value has been the case of. GESCO had valuable assets. But the stock traded at very cheap valuations in the markets.

Yet the company was not ready to make a decision that would unlock shareholder value. Abhishek Dalmia, a member of the Dalmia family, threatened to take over the business and launched an open bid.

After much deliberation, the promoters launched their own open offer which generously rewarded shareholders. However, this is a rare case where promoters have been forced to back down and respond to the needs of shareholders.

Nonetheless, minority shareholders in India, especially institutions, have taken the initiative to make Indian developers more responsible.

Theoretically, Indian companies managed by promoters should not have the usual conflict of interest between directors and shareholders. However, Indian developers want the best of both worlds.

Thus, they often pay themselves huge salaries, while simultaneously earning dividends and buyouts. The salary is a safety net in case the company is unable to pay dividends.

The 2013 Companies Act limits executive compensation to 11% of the company’s net profit. But, quite often, executives are paid a much higher salary, without the permission of the central government or shareholders.

Some promoters often use shady tactics to earn a high salary without having to deal with shareholder objections.

For example, a listed alcohol company in Madhya Pradesh classified its chairman and subordinate, both promoters and brothers, as employees rather than directors.

This maneuver allows them to recoup nearly 30 percent of the company’s profits in the form of wages without having to worry about the outrage of shareholders.

Yet high salaries are the least of investors’ worries. Often, promoters engage in obscure (and often unfair) transactions with related parties to divert cash from the listed company.

These often appear in the form of raw material purchases from promoter group companies, mergers with group companies, advisory fees and donations to foundations run by promoters, among others.

While it is easy to detect unfairly high developer compensation, it is quite difficult to determine whether such related party transactions are fair.

Given their high stake in companies, Indian promoters should receive money in the form of dividends rather than high compensation.

This would completely align the interests of the promoters with the interests of the shareholders. In the case of companies that cannot pay dividends, the promoter’s compensation should be linked to the performance of the company rather than being decided arbitrarily.

Usually, companies run by professional managements have fairer compensation policies in India. Independent directors should also focus on protecting the rights of minority shareholders, rather than being complicit in the wrongdoing of promoters.

have always sided with the promoters rather than focusing on their moral obligations to shareholders. After all, few people would leave comfortable, well-paying jobs to fight for justice.

Unfortunately, most of the activism and shareholder research has focused on large corporations. Small companies do not have a strong institutional presence, which makes it quite difficult for minority investors to object to management.

Some large companies have also taken legal action against investors, bloggers and consulting firms in an attempt to silence dissenting voices. Such actions will only further reduce management responsibility.

In recent years, institutional advisory agencies that focus on corporate governance have also become an important part of the ecosystem.

Companies have also realized that transparency and honesty help reduce the cost of capital.

Companies like Vedanta, Zee Entertainment and United Phosphorus, and several others, are trading at lower valuations than their peers who have better governance records.

The rise of shareholder activism is an extremely important step in making companies more accountable to shareholders.


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