SHAREHOLDER ACTIVISM AND ITS IMPLICATIONS FOR CORPORATE GOVERNANCE

Abstract

This article evaluates the introduction of shareholders and their implications for corporate governance and aims to show why these provisions are crucial for shareholders, companies, and professionals to maintain compliance as well as effective governance. There is a role played by shareholder activism in shaping corporate governance because there is a significant connection between these two. Here, the ways to attract shareholders have been mentioned with their key drivers and how different company’s policies have different impacts and implication on shareholders and how that matters. This article also highlights the importance of shareholder activism campaigns and their benefits. The role played by shareholder activism and corporate governance in India is crucial for promoting transparency, accountability, and shareholder value, and understanding both aspects together can help make informed decisions for investing purpose and structure of corporate. Corporate governance is the process of directing and controlling a company, involving shareholders who have an interest in the organization’s actions. Shareholders have voting rights, allowing them to vote on major policies and mergers. Their activism is accountable to management and is driven by factors like underperformance, governance issues, strategic disagreements, environmental, social, and governance concerns, and market conditions.

Keywords

shareholder activism, role of shareholder, corporate governance

Introduction

For the direction and control of a company with a set of rules, practices, and processes, the corporation needs to be governed as the corporate governance. Shareholders, who have an interest in an organization and the outcome of its actions, are included in stakeholder groups, and corporate governance ensures that their interests are balanced by making a proper decision. Through owning shares by shareholders and their expectation of the financial return of a company as a role played by investors. This shareholder has influence over corporate governance because the common shareholder has voting rights, allowing them to vote, electing the board of directors, and approving major policies, which are of the type of importance corporate matters. Also, they can vote for mergers and acquisitions, and their activism is accountable to management. Shareholder activism is driven by several factors, like underperformance, governance issues, strategic disagreements, environmental, social, and governance (ESG) concerns, and market conditions.

Shareholder Activism in Shaping Corporate Governance

Shareholder activism in India has become a significant force in shaping corporate governance. This trend involves shareholders using their rights and influence to bring about changes in a company’s management and policies. The key to its implications is that shareholder activism often pushes companies to be more transparent and accountable. Activists may demand better disclosure practices, improved financial reporting, and more rigorous oversight by the board of directors. Differing visions for the company’s direction can create tension and require careful navigation to balance interests, and this can lead to conflict and challenges because While shareholder activism can drive positive changes, it can also lead to conflicts between management and shareholders. Their significant shareholdings give them the power to influence corporate decisions and advocate for better governance practices. Some regulations provide mechanisms for shareholders to voice their concerns and influence corporate governance, and the legal framework in India, including the Companies Act, 2013, and SEBI regulations, supports shareholder rights and activism. Activism can lead to the adoption of better corporate governance practices, which may include changes in board composition, executive compensation, and strategic decisions that align more closely with shareholder interests.

Crucial Provisions Relevant to Shareholders

To make sure compliance and efficient governance, it is essential for professionals, companies, and shareholders understand these provisions. One major piece of legislation that governs companies in India is the Companies Act, 2013.

Rights of shareholders under the Companies Act, 2013

Right to receive dividend (section 123)[1]: Dividend declaration and payment procedures are described in Section 123. A company may, under particular conditions, declare a dividend from its profits. Although shareholders are entitled to dividends, the company must make sure it makes enough money and abide by all applicable laws. For shareholders, dividend payments represent a significant return on investment.
2. Right to attend general meetings (section 101)[2]: Companies must give at least 21 days’ notice for general meetings under Section 101. Attendance and participation in these meetings are rights of shareholders. The agenda, date, time, place, and other relevant details must all be included in the notice. Transparency is maintained in this part, enabling shareholders to make well-informed choices.
Right to vote (section 109)[3]: Shareholders have the right to vote under Section 109. Resolutions put proposed at general meetings are subject to the vote of shareholders. Voting processes, such as show of hands and poll voting are described in this section. In order to vote on their behalf, shareholders may also choose proxies. Shareholders can influence company decisions by using their voting rights.
Right to inspect documents (section 94)[4]: Section 94 allows shareholders to inspect certain company records, including minutes of general meetings, register of charges, and books of account. Shareholders have the right to access these records to ensure transparency and accountability. This section promotes informed decision-making and helps shareholders monitor company activities.
Right to receive copies of financial statements (section 136)[5]: Companies must give shareholders annually financial statements, including audited balance sheets and profit/loss accounts, in accordance with Section 136. These statements, which allow shareholders to evaluate the company’s financial condition, are legally required to be provided. Making informed investing decisions is made easier and transparency is guaranteed in this part.

These rights aim to improve governance, enhance transparency, manage risk, increase investor confidence, and protect shareholder rights.

The Companies Act, 2013, provides robust protections for shareholders through various provisions. Key sections ensuring shareholder protection include:

Sections 166, 184, 211, 224, and 245 safeguard shareholder interests by:

Ensuring Director Accountability (Section 166)[6]: Directors must act in the company’s best interests, avoiding conflicts and ensuring fair dealings. This provision holds directors accountable for their actions.
Disclosure of Interests (Section 184)[7]: Directors must disclose their interests in company transactions, preventing self-serving decisions.
Transparent Financial Reporting (Section 211)[8]: Companies must present accurate financial statements, enabling shareholders to assess performance.
Independent Audit (Section 224)[9]: Auditors provide objective reports on financial statements, identifying potential irregularities.
Shareholder Empowerment (Section 245)[10]: Shareholders can file resolutions to address grievances or propose changes.

Shareholder rights and protection provisions enhance governance, transparency, risk management, investor confidence, and protect shareholder rights, resulting in improved governance, increased investor confidence, and better risk management.

The act aims to ensure fair treatment, promote transparency and accountability, encourage responsible corporate governance, protect shareholder interests, and foster investor confidence and trust.

Corporate governance, investor protection, shareholder empowerment, regulatory compliance, and economic investment are all subject to the Companies Act, 2013. In order to safeguard shareholders’ interests and guarantee equitable treatment, the Companies Act, 2013 includes a number of provisions regarding them. This Act of Company is a comprehensive law that regulates Indian companies.

Duties of Shareholders with their Drawbacks

The Companies Act, 2013 outlines shareholders’ fiduciary duties, including acting in the company’s best interests, avoiding conflicts of interest, not misusing company information, not engaging in insider trading, and complying with the company’s Memorandum and Articles. Protection methods include mandatory disclosures, independent audits, director accountability, shareholder empowerment, and regulatory oversight.

The Companies Act, 2013, outlines statutory duties for shareholders, focusing on acting in the company’s best interests, avoiding conflicts of interest, and not misuse company information. These duties are typically applied to directors, not shareholders. However, true fiduciary duties, which include loyalty, care, and disclosure, are typically imposed on directors, trustees, and other fiduciaries, requiring them to prioritize the company’s interests or beneficiaries. These provisions promote responsible shareholder behavior and align with good corporate governance practices.

Shareholders, while not fiduciaries, have responsibilities such as exercising informed judgment when voting, attending general meetings, engaging with the company, and monitoring company performance and governance.

Shareholders do not have a duty of care under Indian law. However, they are important stakeholders and their responsible conduct contributes to good corporate governance.

Shareholder Activities and Corporate Governance: Both Intersection

Shareholder activism involves influencing corporate strategy, performance, and enhancing governance practices. On the other side, corporate governance is of board composition and independence with managing risk, audits, and the requirement of transparency and disclosure. Previous and ongoing trends and developments show the intersection of shareholder activism and corporate governance in India through shareholder participation in general meetings, voting on resolutions, and engagement with management and the board, which increased shareholder activism and strengthened corporate governance.

Importance of Shareholders[11]

1. Ownership and Capital: The shareholders are the recipients of the company’s capital needs, such as for operating and expanding the business, and act as organization owners.

2. Corporate Governance: Shareholders act as the main players in corporate governance by nominating and electing the company’s board of directors, and making the board answerable and transparent in its actions, as well as setting ethical standards.

3. Risk Management: Besides sharing the responsibility for the company’s longevity, shareholders are likely to get involved with risk management to protect the long-term stability of the business.

4. Market Discipline: The market forces drive shareholders towards attentive monitoring of the firm’s performance as well as their contribution to its stock prices. Hence, it results in the introduction of responsible business conduct and in justifying performance improvement.

5. Corporate Performance: Performing well at investors’ aspect converges with the firm’s Profits, stimulating leadership approaches that ensure growth, innovation, and competitiveness.

Ways of Attracting Shareholder in a Company

A shareholder can be an individual, company, or institution that owns at least one share of a company and therefore has a financial interest in its profitability. A shareholder can also be known as a stockholder.[12]

Shareholders can be attracted by financial incentives of attractive valuation resulting in strong, clear corporate governance policies, and it also requires regular financial reporting with transparent decision-making. A company can adopt a clear business strategy with innovative products or services by applying and taking forward shareholder-friendly policies of their rights plan and protection agreement and also by contributing to corporate social responsibility (CSR) to have social impact for investors, which builds strong brand identity with good recognition of visibility of brand reputation. From growth prospects, the company could expand market share through strategic partnerships. If these strategies are applied by a company that conducts regular shareholder meetings, opens communication channels, and has an investor relations program. If there are timely updates on all these and on company performance, it can attract shareholders and also retain them; this will lead to a long-term investor base of growth.

Is Different Companies’ Policies Matter in Corporate Financing of Shareholders?

Different company policies have the importance of shareholder financing from aligning of interest by ensuring shareholders goals to aligning them with company objectives by like their financial policies, which may help for risk management policies of dividend policy, capital structure policy, investment policy, these risk management process ensure mitigating risks associated with shareholder financing and other policies of governance policies, disclosure policies of transparency in disclosing financial terms of risks and benefit, there is also shareholder value policies, and audit committee policy which can significantly impact shareholders’ dividend income, capital appreciation, voting rights, and participation. This various policy, which clarifies expectations and ensures regulatory compliance with strategic growth, made the effective company policies with shareholder financing the impact on shareholders and also their different implication on it, as these different company policies matter in corporate governance and regulate a strong foundation for investor confidence in the form of transparency and growth.

Importance of Shareholder Activism Campaign: Promoting Corporate Governance

To protect corporate governance and shareholder interest by fostering long-term value creation, there is importance of shareholder activism campaigns, which may improve company performance. Shareholder activism campaigns can drive positive change, but they also have many challenges of resource-intensive, strong reach, and an analysis of collaborative research approaches, which make shareholders with persistence and flexibility as their success factors. With clear goals and objectives that build strong best practices, these types of activism addressed their key issues, which are essential as this campaign promotes good and improved corporate governance, protects shareholder interests, and enhances long-term value.

Effect of Procedure During Insolvency on Common Share Holder and Preference Shareholder

During insolvency, the impact on common and preference shareholders can be significant and varies based on the type of shares they hold:

Common Shareholders

Common shareholders often face residual claims, loss of investment, and limited voting rights during insolvency. They are last in line to receive assets, and their influence is typically limited compared to creditors and other stakeholders.

Preference Shareholders

Preference shareholders have a higher claim on assets, receive fixed dividends before common shareholders, and can be converted into common shares, potentially offering recovery potential based on the company’s restructuring plan.

In both cases, the exact outcomes depend on the specific terms of the insolvency proceedings and the company’s financial situation.

Role of Shareholders in the Governance and Functioning of Businesses

Under the Companies Act, 2013, shareholders play a crucial role in the governance and functioning of a company. Some key roles and rights of shareholders, along with voting rights on important matters, as the owner of the company holding shares issued by the company. The company documents that the shareholder can inspect include the register of members, annual return, and minutes of the general meeting. Shareholders are entitled to receive dividends, and even they can transfer shares to others, subject to the company’s articles of association.

These roles and rights ensure that shareholders have a significant say in the management and direction of the company, while also protecting their interests.

Shareholder Activism of Key Drivers

Shareholder activism in India has been gaining momentum, driven by a more informed investor base and a robust regulatory framework. They have increased influence on corporate strategies and governance practices. They have the regulatory support as The Companies Act, 2013, and SEBI regulations provide a strong legal framework for shareholder rights, enabling them to hold companies accountable. The introduction of e-voting as a digital tool has made it easier for shareholders to participate in decision-making processes, ensuring their voices are heard.

Conclusion

The role played by shareholder activism and corporate governance in India is crucial for promoting transparency, accountability, and shareholder value, and understanding both aspects together can help make informed decisions for investing purpose and structure of corporate.

There is the rise of shareholder influence and its impact on corporate practices, and for this, the shareholder as an investor should be empowered. For the effective road ahead for corporate governance, effective corporate governance and shareholder activism are essential for promoting transparency, accountability, and responsible investing principles. They help foster a culture of good governance, ensuring long-term sustainability and competitiveness for companies in India. From the shareholder activism in effective ways of regulatory framework, it will shape and enhance and will continue to shape corporate governance landscape by prompting transparency, accountability, and long-term sustainability, which will lead to good corporate governance and standards.

References

Shareholders, Groww, https://groww.in/p/shareholders
https://www.icsi.edu/media/portals/86/Geeta_Saar-58_Payment_of_Dividend_Part-1.pdf
https://rajdhanicollege.ac.in/admin/ckeditor/ckfinder/userfiles/files/Corporate%20Governance.pdf
Companies Act, No. 18, Acts of Parliament, 2013, (India)

[1] Companies Act, 2013, § 123, No. 18, Acts of Parliament, 2013, (India)

²Companies Act, 2013, § 101, No. 18, Acts of Parliament, 2013, (India)

[3] Companies Act, 2013, § 109, No. 18, Acts of Parliament, 2013, (India)

[4] Companies Act, 2013, § 94, No. 18, Acts of Parliament, 2013, (India)

[5] Companies Act, 2013, § 136, No. 18, Acts of Parliament, 2013, (India)

[6] Companies Act, 2013, § 166, No. 18, Acts of Parliament, 2013, (India)

[7] Companies Act, 2013, § 184, No. 18, Acts of Parliament, 2013, (India)

[8]Companies Act, 2013, § 211, No. 18, Acts of Parliament, 2013, (India)

[9]Companies Act, 2013, § 224, No. 18, Acts of Parliament, 2013, (India)

[10] Companies Act, 2013, § 245, No. 18, Acts of Parliament, 2013, (India)

[11] Shareholder: Meaning, Work, Types, Rights & Importance, geeksforgeeks,https://www.geeksforgeeks.org/shareholder-meaning-work-types-rights-importance/

[12] Shareholder vs. Stakeholder: What’s the Difference?, Investopedia,

https://www.investopedia.com/ask/answers/08/difference-between-a-shareholder-and-a-stakeholder.asp

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