Why Shareholder Activism is necessary ?

Why is shareholder activism necessary?

Article published as on Wednesday, 11^th April, 2020 at 1:22 p.m.   

Background

To understand shareholder activism lets understand activism - it is a campaign to bring a political or social change.

Here campaign means to educate and make people aware of situation. 

Social activism

In recent time we have seen protest to bring change in banking regulations to protect depositors after failure of some co-operative banks (PMC Bank) and fortunately, they succeeded in bringing a change now depositors insurance is 5 lacks instead of 1 lakh, this is example of activism.

Another example is Paris agreement which is followed by countries and they work on stopping climate change. Even on ground level there are NGO's working on spreading awareness regarding nature conservation.

Political activism

Then there is activism related to politics, which I would say is very successful in India.

Let’s compare political awareness with shareholder awareness 

People say voter turnout ratio is low in India, let’s look at some figures.

2016 US general election 55.70%

2017 Japan's general election 53.68%.

Even though Japan and USA have well educated people and are considered as developed economies we saw the voter turnout ratio (in national elections) is poor, yet they have some of best corporate governance practices of the world.

Shareholder activism is widespread in their stock markets. 

Also regulators are quick in taking action and providing justice.

Now coming to India's scenario.

2019 India's general election 67.11%

To just to compare.

Voting percentage of HDFC bank of its AGM resolution by public non-institution investors (individual shareholders) it’s was just 5.5% and situation is similar across the board.

(Read my article on individual shareholder)

Here one share, one vote system applies so it is in interest of large shareholders to vote, making this ratio even worse.

We have such good voter turnout in national elections is because 

1) People here are well educated and made aware of their responsibility regarding voting.

Same thing when we see in listed companies there is lack of interest and participation. 

The reason is lower awareness among shareholders.

Shareholder activism is about education and awareness among retail and minority shareholder, so they are in better position as an informed shareholder.

Shareholder activism

Retail and minority Shareholder activism is absent and following are drawbacks due to it.

Whenever I see notice on exchanges (BSE/NSE) website by any company (HDFC bank, M&M, L&T, etc) regarding investor/analyst meet we never find individual name, it’s always institutions.

Companies have time for institutions but hardly any time for minority shareholders.Even in AGM, sometimes questions asked by minority shareholders are bluntly IGNORED.

(This is personal incident- at a company’s general meeting I met a person named Mr. Gulati who had huge holding, he tried to meet senior management for months but wasn’t allowed to, even his questions at the meeting were not answered properly, this is the oppression and injustice done towards minority shareholders.)

To solve this problem and change this situation, creating shareholder awareness is necessary.

Thus, electing Small Shareholder Director to protect our interest becomes necessary.

Law also provides us minority shareholders an opportunity to safeguard our interest through small shareholder director.

(We shall learn more about benefits of shareholder activism and small shareholderdirector and related laws in next article.)