SHAREHOLDER ACTIVISM & CORPORATE GOVERNANCE

“No taxation, without representation” was the clarion call in the last century; when political democracy was being introduced in the Western world.  Of course, images of Magna Carta and the Boston Tea Party can be vividly recalled by those that have studied the Anglo-American history of yester years.  In the UK; as a bastion of conservatism and a class-riven society from time immemorial, those in authority were revered and not challenged; excepting briefly during the reign of Charles I and Henry VIII; when such protests escalated into gruesome violence.  Oliver Cromwell, the first English Republican to embrace democracy, could not, however, sustain it through his leadership.  Besides, while the British Isles became a cradle of democracy internally, it chose not to cultivate this in its colonies - especially in the U.S., even though the same Anglo-Saxon blood ran through their veins !

It is against this historical backdrop and in a similar vein that one can see the initiative taken by the Securities and Exchange Commission (SEC) in the U.S.  They have, indeed, put the cat among the pigeons; or as some may call it ‘the cat among the bandicoots’ !  Given, that the corporate chieftains in the U.S. and Europe have not exactly covered themselves in glory, what with scandals and shenanigans clouding the entire gamut of corporate governance in the last few years. 

The SEC has proposed that those with 5% shareholding in public / listed companies can nominate directors by way of postal ballot and proxies.  This radical action could clearly undercut the ability or, as some might say, the manipulative manoeuvrability of the Management of a company to constitute the Board of Directors (BoD) of their choice; thus fulfilling a façade of corporate governance and yet, at the same time, ensuring that directors, thus chosen, are beholden to them for their nomination and acceptance; even the so-called “independent directors”. 

This historical and arguable backdrop apart, shareholder activism, is once again on the rise in the U.S. - principally on the back of a string of corporate scandals that have almost irretrievably damaged the credibility and image of the corporate executives.  The CEOs are no longer trusted implicitly.  Some of their exuberant and arrogant styles of functioning and running the companies like fiefdoms are no longer tolerated.  A few of the major pension funds in the U.S. including CALPERS, have decided to move from being passive to proactive and think out-of-the box in their dealings with investee companies.  Perhaps, the pendulum has swung again and some investors now wear iconoclasm and irreverence as badges of honour.

Hence, the new regulatory amendment now being initiated by SEC and debated in the market place is both, relevant and interesting.  The shareholders would wish and get to see their directors elected i.e. not foisted by the Management of the companies and accepted willy-nilly;  with no debate or dissent, even when warranted.  One of the key objections to the present system is that the shareholders have only a choice of yes or no as part of their voting rights at shareholder meetings or annual general meetings (AGMs).  The Management propose the changes to the BoD, even if endorsed by the current BoD. This is what is sought to be avoided; as effectively, this is tantamount to the executive body of a corporation nominating the board of governance and supervision. 

This debate with SEC therefore is going to be indeed a ‘battle royale’.  Even if independent directors are nominated by the Management, one can argue that right at the outset, their independence is somewhat compromised.  Of course this is a chicken and egg situation.  Someone has to propose the directors and one cannot leave it to a whole body of shareholders to propose names.  But there is no harm in allowing major shareholders (say those holding 5% and above), to nominate or propose directors during a limited period.

Shareholders meetings hitherto, have been in some cases, stage-managed and clinically conducted.  Allowing directors to be nominated across the board (pun unintended) is thus going to create a pandemonium; perhaps like what we witness in parliaments around the world in terms of vociferous debates and acidic comments.  Not that these do not happen currently; especially if a company is not doing well or mired in public controversies.  A key question is to what extent should shareholder activism be carried through.  One could argue that it is their money that is at risk.  Therefore (like taxation giving representation in the parliament), their voices should be heard. They should have the ability, as master of the company, to have the executives and directors accountable to and answer their requirements fully and fairly.  

On the other hand, these moves could prove to be disruptive; if the shareholders are allowed full freedom, this could hinder decision-making in corporations.  This can also put the executives forever second-guessing.  Those in the Management, that wish to avoid controversies or required to take difficult decisions, could become susceptible to various pressures and ‘policy’ groups.  They may end up trying to play safe and this could, ultimately, harm the interests of the shareholders themselves.  The rights of minority shareholders.  ‘Majority / management override’ will become issues that will not go away.

Ultimately, (a) ethical behaviour and (b) shareholders taking more than passive interest are going to be the real drivers for improved corporate governance.  This need not degenerate into a ‘free for all’; and yet there should be more frequent (not just once a year) investor-relations conferences and meetings with key shareholders.  The Management of companies and their Board members need to keep close contact with their constituencies i.e. the shareholding base; to avoid surprises.  The shareholders will thus have a real feeling of ownership and participation; from which only good can come out.  These meetings ought to be kept as low-key briefings and discussions; especially if unaudited figures are to be disclosed.  But just as this can be done with the banks and the bond holders, there is no reason why it cannot apply to the shareholders.

Ultimately, it is the spirit and the principles of this issue that matters; whereby shareholders are given the opportunity to be vigorously participative.  Many may not exercise that choice; especially if they, as small shareholders, cannot influence the course of events.  It is only the petulant or the obstructive who hold only a small shareholding but seek to hog the limelight and the spotlight.  But then, these species are there anyway; even as we speak !  

[The author is General Manager of Emirates Bank.  However, the views expressed in this article are not necessarily shared by the Bank].

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