Nothing is quite as infamous as shareholder activism. For corporations, just like in governments, CEOs, directors and other executives get hot under the collar whenever there is unrest within the company’s shareholding structure.
This is especially where the activism is geared towards board placements or combing outdoor corporate governance practices that have been traditionally held by the board. Although activist shareholders are hailed as novel key players in corporate governance, and an accepted strategy across global markets for investors seeking to influence policies and managerial behaviours, executives find their activism quite unsettling.
I once came across an interesting article, which challenged CEOs and business executives to seek a “declaration of independence” and completely free themselves from the influence of activist investors. The result being to run the company as they saw best.
Interestingly, the article went on to suggest that corporate leaders need to build a coalition against activist shareholders, to free boards and executives from the “nuisance of activist shareholders”. Isn’t this thought just interestingly provoking? The writer seemed to propose that boards should be completely insulated from activist shareholders.
Just to put any doubt to flight, boards are essentially created to serve as a mechanism for protecting the interests of all shareholders and other corporate constituencies. This fragmentation in ownership economises on the costs of decision-making by avoiding the need to inform shareholders and obtaining their consents for all decisions, save for only fundamental ones.
Having this in mind, and the distinction between the board and the shareholders, it is imperative that a board should remain responsive to the interests of the shareholders, including the activist shareholders who bear the costs and benefits of the company’s decisions.
Now back to the article, completely isolating the two factions and giving activist shareholders a blind eye, is much damaging in terms of corporate governance. Critically, activist shareholders try to play a pivotal role in corporate decision-making, which role benefits not only the shareholders but also the corporation.
Activist shareholders would usually want to make the corporation as profitable as possible to maximise the value of their shares.
To this extent, they not only serve their interests but equally those of other shareholders as well.
Activist shareholders, therefore, do assert power in the corporate governance arena, and promoting shareholder democracy is a useful way to constrain managerial misbehaviour. To this end, activist shareholders need to be taken seriously, especially when advocating for proper governance.
Instead of a board completely insulating itself, it should in retrospect view such past activism as an opportunity for value creation, self-examining itself and identify corporate weaknesses to keep shareholders happy and activists at bay.
The point precisely is that large corporations need to develop robust corporate models by having boards that are aggressively connected with shareholders and responsive to the investors’ needs.
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