Activism now needed to shake up sleeping boards of NSE firms

These are difficult days for shareholders. Allegations of fraudulent financial accounts, lop-sided pay packages, poor corporate governance practices among other issues are leaving retail investors questioning whether markets are rigged against them.

In an era where incumbent management wholly determine corporate direction, the voice of retail investors appears to hold no sway.

It’s worth noting that in the recent past, some management initiatives have failed spectacularly, to the financial disadvantage of the small holder investors.

Kenya Airways, Uchumi and the National Bank provide recent high-profile examples. In this article, I argue why shareholder activism (active involvement of stockholders in their companies) provides a solution to this situation.

A proxy fight wherein the current directors and management are pitted against the investors trying to usher in change could push for the change that is required.

But does shareholder activism work? Yes, and here’s why. Activist campaigns have been shown to result in substantial long-term gains in overall shareholder value. Studies show that abnormally high returns continue over the second and third year following a campaign.

Measurements of operational performance, such as sales growth, return on assets, return on equity, cash flow, earnings and productivity, also improve during the second and third years.

Perhaps even more important than the noted benefits, is that corporate boards have begun to proactively implement policies to stave off potential proxy fights.

Activism is now forcing boards to become more efficient and to ensure that they are actively taking the steps necessary to produce results for their shareholders.

So, how can local investors engage through activism? How can activism succeed when individual investors own less than 20 per cent of the market according to CMA’s capital markets bulletin-Q4 2015?

It’s obvious retail investors will not win proxy battles owing to their small-size stakes but can still meet the same objectives through moves such as litigation, negotiations with management and publicity campaigns including a “vote no” campaign where an investor (or a coalition of investors) urge shareholders to withhold their votes from one or more of the board-nominated director candidates.

Generally, these “outside” campaigns will be necessary since listed companies will require support from a majority of outstanding shares and not just a majority of the votes cast at the meeting, which is a much lower threshold.

Companies ripe for activist campaigns should typically be ones that are mismanaged and undervalued. Entities with stagnant boards, underperforming managers and inefficient operations should also form part of the main targets.

In all, retail shareholders must realise that their active participation in the company’s operations is necessary to ensure better management, less fraud and better governance.

A management that knows that it will be questioned and held responsible for its actions, is always on its feet.

Shareholders can ensure that the company follows good corporate governance practices and implement benefit policies. They can help resolve issues laid down in the annual and other general meetings.