The Rise of Shareholder Activism

Name: Mayukha
ID: 20151126
Class: BBA-LLB (A) 2015
The Rise of Shareholder Activism
Abstract
Shareholder Activism is being actively used as a corporate mechanism to ensure that
corporations keep in mind the interests of shareholders. Shareholders have been actively
engaging in policy decisions and have been demanding managements to act in a way that
ensures the protection of environment, its employees and the society at large. Shareholders
don’t always work towards a financial motive. Sometimes they wish to ensure that their
ethics and morals are also in place by the decisions taken by management. Shareholder
activism is a movement that seeks changes in corporate behavior. This paper analyses the
rise of shareholder activism and how it has been changing the way that corporations
function.
I. Introduction
Why do businesses exist? Do they exist to earn profit or to serve a purpose? Does the
business run for its shareholders or for the society which include its customers, employees
and the environment? The conventional view is that businesses exist exclusively to earn
profit. But to earn profit, a Company is forced to care about the society. Corporations are
connected to the society through their operations and these operations can be favorable or
detrimental to the society. Through its operations, Corporations engage with the environment
by the use of natural resources, the people they employ and the pollutants they emit.
Corporations have to make high quality products otherwise customs will stop by, it has to
treat its workers well or they’ll leave and it cannot harm the environment or it will lose its
brand’s reputation. Take for instance, a beverage company, which may be under the pressure
by its owners to ensure that financial returns are high and the Company is making profits,
while at the same time it might be stuck in several lawsuits filed by consumers challenging
the health hazards or the plastic produced by this beverage Company. The Company would
therefore be under the obligation to satisfy both: its owners and the consumers.
In a perfect corporate environment, directors would be managing a successful business, the

Company would be issuing regular healthy dividends and shareholders would be
overwhelmingly happy. But this is not always the case. Traditionally, shareholders have
accepted their share certificate and put faith in their directors to create a return on their
Name: Mayukha
ID: 20151126
investment. More recently though, shareholders are becoming more active in their company
activities. They are exercising their rights and demanding accountability from directors.
These recent instances of dissent are in sharp contrast to the past where investors and even
minority shareholders rarely raised concerns about major management decisions. This
participation by shareholders is given the name of “shareholder activism.” Shareholder
activism can be defined to include any action(s) of any shareholder or shareholder group with
the purpose of bringing about a change within a public company. 1 This movement occurs
when socially concerned investors use their equity positions to call for increased
transparency, better reporting, or in some instances, policy changes in Corporations. 2 It can
also be described as “a unique form of social movement activism that seeks changes in
corporate social behavior.”3 Activism encompasses a range of activities, some more
aggressive and others less so. It is exerted through letter writing, directly have a dialogue
with the management, through raising concerns and asking questions at open sessions at an
annual general meeting and sometimes by filing of formal shareholder proposals. In many
cases, this movement is also combined by a social cause focusing mainly on social and
environmental issues rather than a financial motive. Thus, shareholder activism can be
broadly classified into two kinds: one which has instrumental objectives and the other that is
driven by socio-ethical considerations.4 These Environmental Social Governance (ESG)
issues are generally sponsored by pension funds, ESG-oriented investment managers,
religious groups or coalitions of like-minded investors. 5 In the former one, the shareholders
express discontent due to the practices adopted by the Board. They feel that the management
is not acting in their best interests which would cause a financial depression. These could
include issues revolving around lowered stock market price, return on dividends and
6
inadequate strategic decisions. In the latter one, the shareholders express concern with
1
Rose, Paul, and Bernard S. Sharfman. "Shareholder Activism As A Corrective Mechanism In Corporate
Governance". Digitalcommons.Law.Byu.Edu, 2014, https://digitalcommons.law.byu.edu/cgi/viewcontent.cgi?
referer=&httpsredir=1&article=2943&context=lawreview.
2
King, Leslie, and Elisabeth Gish. "Marketizing Social Change". Sociological Perspectives, vol 58, no. 4, 2015,
pp. 711-730. SAGE Publications, doi:10.1177/0731121415576799.
3
4
R. Ivanova, Mila. "Influencing Corporations through shareholder activism: The case of three NGO led
campaigns in the UK” Orca.Cf.Ac.Uk, 2015, https://orca.cf.ac.uk/83835/1/Mila%20Ivanova%20PhD
%202015.pdf.
5
Losasso, Elisabeth, and Adrian Dellecker. "Shareholder Activism: Standing Up For
Sustainability?". Luchoffmanninstitute.Org, 2018, https://luchoffmanninstitute.org/wp-
content/uploads/2018/04/Shareholder-activism-report-.pdf.
6
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ID: 20151126
respect to ethical, environmental or social practices adopted by the Corporation. It has been
observed that years of working with businesses, taught shareholders the efficacy of making
“the business case.” 7 This means that if the investment, financial and business case is clear to
large investors, they may in fact support social, environment, or governance changes if they
can be shown to be in the Company’s business interest. 8 Strategic responses to shareholder
activism and the successful resolution of a claim or issue depends on three factors: a
shareholder’s influence and power, the corporate culture and the degree to which the
shareholder’s request is in line with it, and the political environment in which the campaign
takes place.9 The focus of this paper will be to explore the socio-ethical activism by
shareholders through the help of case studies. Further, this paper shall reflect upon the current
shareholder activism scenario that exists in India, the rights granted to shareholders and the
way forward.
II. Cases of Shareholder Activism

We seem to hear a lot about board room battles between corporations and activists lately, but
shareholder activism has been around for decades in other parts of the world. In India,
shareholder activism and investor activism was virtually absent until recently. But in the last
few years we have started to hear about activist shareholders and investors raise their voice
and raise questions around decisions taken by the management and promoters. In the year
2012, Children’s’ investment fund (TCI) dragged Coal India Ltd. to the Court for the breach
of fiduciary duties and abuse of shareholders. They challenged the Company’s way of
running the coal miner and subsidizing prices. The shareholder group (TCI) managed to force
the world’s largest coal miner to introduce fairer terms and conditions in the power purchase
agreements. Another recent example of shareholder activism is the campaign against the UK-
based mining company: Vedanta Resources. This movement primarily focused on
environmental, social and human rights implications. The mining company operated in the
State of Orissa, Eastern India. This campaign was led by an NGO which incorporated
shareholder activists in their strategy. The challenge was towards the plan of Vedanta
7
8
9
Sjöström, Emma. "Shareholder Activism For Corporate Social Responsibility: What Do We
Know?". Sustainable Development, vol 16, no. 3, 2008, pp. 141-154. Wiley, doi:10.1002/sd.361.
Name: Mayukha
ID: 20151126
Resources to open a bauxite mine on the top of the Niyamgiri hills which is a sacred and
traditional land of the local indigenous people.10 The construction of the bauxite mine
threatens the culture, tradition, religion, physical and economic survival of the indigenous
people living around that area. 11This case study stands out amidst others as the campaign
challenged the core business model of the Company and questioned its ability to build a
bauxite mine and expand a refinery, asking for considerable improvements in company
practice.
While shareholder activism has seen success in other parts of the world, a case that stands out
is the tax justice campaign wherein NGO’s encouraged investors and shareholders to take a
stance on the problem and to encourage the integration of tax as a corporate responsibility
issue within companies.12 The campaign was aimed at changing the attitude of companies
towards dodging tax. The campaign wanted to ensure that the board should understand that
tax is no longer something to be scurried away, but it should be part of a long term risk
management plan. 13
Climate change is one of the most focused issue in several shareholder proposals. We read
headlines of proposals wherein shareholders ask energy companies and utilities about the
impact of a warming planet and the consequences for their business model of
voluntary/mandatory carbon reduction and whether or not new technologies can affect the
competitive landscape. Through shareholder activism, proposals are made to target carbon
footprints, renewable energy models, avoid deforestation and projects that will heavily affect
the environment. The recent past has also witnessed resolutions by shareholders around
topics relating to recycling, waste management, avoiding excessive packaging and reducing
food waste. Questions surrounding a company’s social and environmental policy decisions
10
%202015.pdf.
11
%202015.pdf.
12
%202015.pdf.
13
%202015.pdf.
Name: Mayukha
ID: 20151126
are raised by shareholders. Evidence further portrays that Environment Social and
Governance (ESG) proposals have been an important catalysts of action within Companies. 14
A landmark campaign surrounding the issue of climate change is one that started in 2015,
wherein an investor group named “Aiming for A” filed resolutions at BP and Shell
demanding the companies to disclose more information on how they were adapting to the
low-carbon-transition rule. Later in 2017, there have been various shareholder proposals on
climate change at oil and gas companies and electric utilities. This year particularly has seen
several shareholder proposals around climate, energy and sustainability. Shareholders are
demanding to know how the Company is adapting to climate change. Companies are having
to deal with their operations and their supply chain by adapting to climate change and
shareholders wish to know how the Company that they have invested in are able to
accomplish this. Some other proposals surround issues like diversity and inclusivity of
employees. Shareholders are demanding the Company to be more accepting of people of
different races and sexual orientations. Thus, through these case studies we can observe that
the real focus around shareholder activism is around disclosure. Shareholders wish to be more
aware of the metrics like goals and policies adapted by the Company. They want evidence of
what the Company is actually doing. In essence, shareholders have greater expectations from
the Board of the Company.
III. Shareholder Rights in India

Though there may be various national laws and regulations that apply to corporations in a
particular country with respect to the rights granted to shareholders there are certain rights
granted to shareholders in almost every jurisdiction. These include the right to share in the
company’s profitability, a degree of control and influence over the company management
selection and general meeting voting rights.15 Shareholders enjoy the right to attend and
participate in the Annual General Meetings, to ask questions and to vote. The Shareholders
also have a say over other important aspects of company policy such as re-election of
directors.
14
15
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ID: 20151126
In India, there have been various legislations that have been introduced to guarantee the
rights and remedies to shareholders. Under the Companies Act 2013, there are certain
provisions which shed light on the issue of shareholders rights. Small shareholders can seek
to appoint a minority shareholder representative on the board of the company to ensure the
representation of minority shareholders as well.16 Additionally, through a resolution by
simple majority, a director can be removed by the shareholders.17 Similarly, shareholders can
also exercise a right to institute class action suits if they feel that the company is managing its
18
affairs in a manner that is prejudicial to the company or its shareholders. This provision
requires the support of at least 100 shareholders or 10% of the total number of shareholders,
whichever is lower. 19 Other statutory matters and policy decisions taken by the company also
require the approval of majority of shareholders in many matters. These matters include party
transactions, investments and borrowings, executive remuneration, sale of an undertaking of
the company, amendment of the constitutional documents of the company and the issue of
new shares.20 Under the Indian legislation, shareholders also exercise the power to call for
general meetings.
The SEBI is another legislation that promotes the rights and remedies of shareholders. These
rights include the right to electronic voting facility to shareholders to ensure wider
shareholder engagement, to disclose the outcomes of board meetings, other policy decisions
like corporate acquisitions and re-structuring events. Basically, a huge amount of importance
is given to the opinions of shareholders. In addition to SEBI, there is also a provision under
Section 245 of the Companies Act where any member whose right is infringed or are
prejudicial to the interest of the organization due to the act of the director can make an
application before the Company Law Tribunal asking for intervention. 21 Apart from these
rights guaranteed under legislations, shareholders may raise concerns with their companies
directly in person or by using open letters. Recent cases have also proven that shareholders
can seek recourse under the High Courts of India. In a situation where the shareholder feels
that the welfare provisions laid down by the legislators have been deprived off, they can also
approach the Labour Tribunal to exercise their rights.
16
The Companies Act, 2013.
17
18
19
20
21
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ID: 20151126
IV. The Future of Shareholder Activism

We have seen shareholder activism evolve over the last few years and probably the watershed
movement surrounding this movement was the Companies Act, 2013, which gave a lot of
teeth to the minority shareholders. We are at a tipping point at activism. The legal and
regulatory toolkit has been significantly expanded and conceptually we are moving away
from a state led/regulatory led mechanism to a market led activism. Through the introduction
of e-voting, rise of proxy advisory firms and class action suits, we see that frameworks are
being developed by markets to start its own corrective mechanisms to address lapses in
governance as well as to take the conversation to the next level in terms of more active
participation by key shareholders. Shareholder activism helps push companies to improve
their performance and pay more attention to social and environmental sustainability issues.
There is clear evidence to show that Companies that act on shareholder activism find
competitive advantages in product, labour and capital markets. For instance, a company that
manages its water risks, climate change risks, ensuring predictable supply chains of natural
resources may have an impact on a company’s bottom line. But despite all this, bringing
about a change has been a slow process. Investors in many scenarios still keep quiet or the
few people who are making a noise are too few and far between. We need a large group of
people who hold the board accountable. There is a need for a new, holistic approach to
shareholder activism for sustainability. This must include raising awareness on the issue
among large relevant actors and the involvement of a bigger audience.

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Name: Mayukha

The Rise of Shareholder Activism

In a perfect corporate environment, directors would be managing a successful business, the

II. Cases of Shareholder Activism

III. Shareholder Rights in India

IV. The Future of Shareholder Activism

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