In the world of corporate governance, the influence of shareholders has evolved over the years from passive oversight to active participation in steering important company decisions. This ‘shareholder activism’ that was once considered a niche activity, has now become a global phenomenon, with institutional investors, activist funds, and even retail shareholders increasingly holding the Boards accountable. The rise of proxy advisory firms, which guide shareholders on voting matters, has further democratised this power. While the western world has been at the forefront of this movement, shareholder activism in India has also been gaining momentum, thereby signaling a significant shift in corporate governance in the country.
The Rise of Shareholder Activism
Globally, shareholder activism has transformed how companies operate. Activists often target underperforming companies, demanding strategic changes such as improved governance, better capital allocation, or even management reshuffles. Shareholder activism in the US has brought to the fore the power of shareholders to influence the fate of major corporations. Shareholder activism in the country began gaining traction in the 1980s with the rise of corporate raiders and hostile takeovers, driven by big investors and financiers like Carl Icahn or T. Boone Pickens. These activists sought to overhaul management and restructure companies for higher returns. During the two decades starting from 1990, there was increase in involvement of institutional investors who pushed for better corporate governance and accountability in the country. The focus shifted in the 2010s towards environmental, social, and governance (ESG) issues, with activists advocating for sustainable practices and diversity. Today, shareholder activism continues to shape corporate policies, emphasizing transparency, accountability, and long-term value creation.
Shareholder activism in Europe gained momentum in the early 2000s, driven by a push for improved corporate governance and transparency. The introduction of the Shareholder Rights Directive in 2007 by the European Union aimed to empower investors by enhancing their voting rights and engagement. Activists, including institutional investors and hedge funds, began to influence corporate policies, focusing on executive remuneration, board diversity, and environmental sustainability. In recent years, European shareholder activism has increasingly addressed ESG issues and corporate social responsibility, reflecting broader societal concerns. Regulatory reforms and increased shareholder engagement have further shaped the evolution of activism across European markets. With stricter regulatory frameworks and increased pressure from socially conscious investors, European companies face scrutiny over sustainability, labour practices, and diversity on their boards. Activists are not just looking for financial returns; they are advocating for long-term value through responsible governance.
The Role of Proxy Advisory Firms
Proxy advisory firms, which provide voting recommendations to shareholders, play a key role in facilitating shareholder activism. By advising on issues like executive compensation, board elections, and mergers, these firms help ensure that shareholders have the information they need to make economically sound decisions. This increases the effectiveness of shareholder activism by enabling informed voting on key issues, which can ultimately lead to better corporate performance and governance. Proxy advisory firms also level the playing field, particularly for institutional investors who may not have the resources to conduct in-depth research on every issue. By providing guidance on governance and strategic matters, they help improve decision-making and enhance economic outcomes for companies and shareholders alike.
Shareholder activism in the US is often bolstered by big proxy advisory firms like the Institutional Shareholder Services (ISS) and Glass Lewis & Co., which provide voting recommendations to institutional investors. These firms analyse company performance, board structure, executive compensation, and ESG practices, giving shareholders the necessary data to make informed decisions. Their influence in shaping shareholder votes on critical matters, such as mergers, appointment of directors, compensation policies etc. cannot be understated.
Shareholder Activism in India: A Growing Force
Historically, Indian shareholders, especially retail investors, have played a limited role in influencing corporate decisions. But with increase in institutional investment, regulatory reforms, and greater awareness of corporate governance, shareholder activism in India is gradually gaining ground. Although the concept is relatively in a nascent stage in India as compared to that in the West, it is rapidly gaining importance.
There are many factors behind this gradual shift towards shareholder activism. At the top of it is the ever-widening regulatory framework implemented by the Securities and Exchange Board of India (SEBI) that has, over the years, shifted its focus to protection of the interest of the minority shareholders and promoting transparency. This has got the much-required fillip with the introduction of the Companies Act, 2013 also.
Another big reason behind increased shareholder activism in India is the country’s growing institutional investor base, both domestic and foreign, that has begun to adopt global best practices in corporate governance. These investors are increasingly voting against resolutions they deem detrimental to shareholder value. For instance, the decision by several institutional investors to vote against excessive executive compensation packages and related-party transactions has set a precedent for more accountability in Indian boardrooms.
As for the retail investors, they are also getting more involved due to improved access to information and growing awareness of their rights. The rise of online platforms and shareholder advocacy groups is providing a voice to individual investors who historically felt sidelined by institutional shareholders and large promoters.
The Role of Proxy Advisory Firms in India
Proxy advisory firms in India have played a pivotal role in the growth of shareholder activism in the country. Proxy advisors are driving greater transparency by offering independent assessments of company performance, executive compensation, and governance structures. By scrutinizing resolutions with respect to promoter remuneration, related-party transactions, board composition, appointment of directors, mergers, dividend policies, and ESG matters they empower shareholders to challenge corporate decisions that may not align with their interests. In India, firms such as Institutional Investor Advisory Services (IiAS) and Stakeholders’ Empowerment Services (SES) have emerged as key players in advising institutional and retail shareholders on corporate governance issues.
However, the role of proxy advisory firms in India has not been without controversy. Some companies and promoters view their recommendations as intrusive, especially when they challenge deeply entrenched promoter-led managements. Furthermore, there have been calls for stricter regulation of proxy advisory firms to ensure that their recommendations are unbiased and based on thorough research.
But despite these challenges, the growing influence of proxy advisory firms in India can hardly be denied. Their role is becoming increasingly important as shareholder activism continues to rise, especially in cases where minority shareholders seek to hold promoters and boards accountable.
Methods of shareholder activism
Here are the primary methods of shareholder activism in India:
1. Voting Rights: Shareholders can exercise their voting rights on key resolutions, including mergers, acquisitions, appointment of directors, and compensation of executives. Institutional investors, in particular, use their votes to influence company decisions. Proxy voting is a common method where shareholders authorize another party (like an institutional investor or a proxy advisory firm) to vote on their behalf at shareholder meetings.
2. Filing Shareholder Resolutions: Shareholders can file resolutions or proposals to be voted upon at a company’s annual general meeting (AGM). These resolutions may pertain to governance reforms, changes in company strategy, or environmental and social issues. Shareholders may propose a resolution calling for better environmental sustainability practices or higher transparency in financial disclosures.
3. Engagement with Management: Activist shareholders can engage directly with the company’s management or board of directors to express concerns or propose changes. This dialogue often happens behind the scenes before any public actions are taken. Shareholders may meet with management to discuss concerns about underperformance or strategic direction.
4. Proxy Battles: Shareholders may attempt to gain control or influence over a company by encouraging other shareholders to vote against management proposals or to support their own board candidates. An activist investor might run a campaign to replace certain board members with their own nominees if they believe the current board is underperforming.
5. Legal Action: Shareholders can take legal action if they believe that the company’s management or board has violated corporate governance norms or shareholder rights. This can include filing lawsuits or approaching regulatory bodies like the Securities and Exchange Board of India (SEBI). If minority shareholders believe they are being oppressed or mismanaged, they can take their case to the National Company Law Tribunal (NCLT) under the Companies Act.
6. Public Campaigns: Shareholders can launch public campaigns to put pressure on the company through media outlets or social media. This is a tactic often used to gain public support and sway other shareholders.
7. Class Action Suits: The Companies Act, 2013, allows shareholders to file class action suits against the company, its auditors, or other relevant parties for any act that is prejudicial to their interests (e.g. company’s financial disclosures were misleading). This method allows a group of shareholders to act collectively.
8. Institutional Investor Activism: Institutional investors like mutual funds, insurance companies, and pension funds often hold significant stakes in companies and can influence management through their voting power or engagement. SEBI has encouraged greater participation of institutional investors in governance through the Stewardship Code.
9. Collaborating with Proxy Advisory Firms: Shareholders can seek advice from proxy advisory firms, which provide research, analysis, and voting recommendations on corporate governance issues. These firms have become influential in shaping shareholder decisions.
10. Activist Investor Funds: Some funds specialize in investing in companies where they see potential for improvements in governance or strategy. These activist investors typically acquire significant stakes in underperforming companies to push for changes that would increase shareholder value. For instance, an activist fund might buy shares in a poorly performing company and advocate for the replacement of the CEO or the sale of non-core assets.
5 notable instances of shareholder activism in Corporate India
(i) Tata Motors – resolution to increase remuneration of directors (2014)
In 2014, a resolution of Tata Motors Ltd. to pay remuneration to its former MD, Karl Slym, who unfortunately had died in January that year, and to two of its executive directors in excess of permissible limits, was rejected by minority shareholders resulting in it not getting 75% votes in favour. The company had incurred loss in the past two quarters, and hence, it had to take stockholder approval because of ‘inadequacy of profit’. But India’s largest auto maker failed to get approval for these resolutions. The act of the minority shareholders at that time was unprecedented, marking the beginning of an era of activism.
(ii) Tata Sons – Controversy around removal of Cyrus Mistry (2016)
The Tata Sons-Cyrus Mistry controversy highlighted the role of shareholder activism in corporate governance. In 2016, Cyrus Mistry was abruptly and unceremoniously removed as the Chairman of Tata Sons, leading to a high-profile legal battle. Mistry, backed by minority shareholders, viz., Cyrus Investment Pvt Ltd and Sterling Investment Corporation Pvt Ltd, moved the NCLT Mumbai raising concerns about the governance practices, transparency, and decision-making at Tata Sons. Shareholders, including institutional investors, became more vocal, demanding greater accountability from the Tata Sons board. The controversy showcased how shareholders can challenge decisions they view as detrimental to the company's interests, using legal avenues and public forums to influence corporate actions and governance in a major conglomerate like Tata Sons.
(iii) NR Narayana Murthy Controversy (2017)
Narayana Murthy, Infosys' founder and a significant shareholder, publicly criticized the company's Board and the then CEO Vishal Sikka over issues like executive compensation, corporate governance, and transparency in a major acquisition. His activism, supported by other shareholders, put pressure on the board leading to Sikka's resignation. This episode highlighted how influential shareholders, especially founders with large stakes, can challenge board decisions and leadership, influencing corporate governance and ensuring accountability, even at large, professionally managed companies like Infosys.
(iv) Raymond Limited case (2017)
This case highlighted the role of shareholder activism in family-owned businesses. In this instance, Raymond's minority shareholders, led by activist investor Amal Parikh, opposed the company's decision to sell prime real estate in Mumbai to its promoter, Gautam Singhania, at an ‘undervalued price’. The activists raised concerns about transparency, fairness, and governance in related-party transactions. Shareholders demanded higher accountability and pushed for better corporate governance practices, eventually leading to increased scrutiny over the deal.
(v) L&T – Mindtree Acquisition (2019)
The Larsen & Toubro (L&T) acquisition of Mindtree in 2019 showcased the role of shareholder activism in mergers and acquisitions. L&T had initiated a hostile takeover by acquiring a significant stake in Mindtree, despite resistance from the latter's founders and management. Mindtree's founders, supported by some shareholders, publicly opposed the acquisition, citing concerns over corporate culture and strategic fit. However, L&T's strong shareholder backing, including institutional investors, enabled it to proceed with the acquisition. This case illustrated how shareholder support can influence the outcome of hostile takeovers, with institutional investors playing a decisive role in determining the future direction of a company.
The Economic Perspective of Shareholder Activism
Shareholder activism, once a fringe movement led primarily by small groups of investors, has grown into a mainstream force with significant economic implications for corporations, markets, and economies. From an economic perspective, shareholder activism plays a vital role in shaping corporate governance, resource allocation, and long-term value creation. Activists, often institutional investors or hedge funds, push for changes that can range from improving operational efficiency to revisiting capital allocation strategies and even overhauling management.
A. Enhancing Corporate Efficiency and Value Creation
At its core, shareholder activism seeks to maximize shareholder value by addressing inefficiencies within companies. Activist investors often target underperforming companies or those with management practices that do not align with shareholder interests. By pushing for reforms such as cost-cutting, restructuring, divestment of underperforming assets, or changes in corporate strategy, activists aim to enhance the overall performance of a company. This focus on efficiency has a direct impact on the economic value of a company. By pressuring management to be more accountable and focus on shareholder value, activism helps ensure that companies are using their resources optimally.
B. Better Capital Allocation
Often a key demand of shareholder activists is related to capital allocation, particularly the usage of excess cash. Many companies accumulate large cash reserves without clear strategies for investment or return. Activists often push for shareholder-friendly policies such as stock buybacks, increased dividends, or strategic mergers and acquisitions (M&A). By advocating for efficient capital deployment, activists seek to optimize the company's balance sheet, ensuring that excess capital is reinvested in growth opportunities that generate higher returns.
C. Corporate Governance and Accountability
From an economic standpoint, shareholder activism enhances corporate governance, which in turn improves the overall economic performance of firms. Poor governance practices, such as overcompensation of executives, lack of board independence, or weak accountability mechanisms, can erode shareholder value over time. Activists often target companies with governance deficiencies, demanding reforms such as better alignment of executive compensation with company performance, enhanced board oversight, and greater transparency in decision-making. By addressing these governance issues, activism contributes to a more efficient allocation of resources within firms, ensuring that managerial decisions are closely aligned with shareholder interests. This improves not only the financial health of individual companies but also the broader market.
D. Short-Termism vs. Long-Term Value
One of the key economic criticisms of shareholder activism is that it can promote short-termism. Critics argue that activists, particularly hedge funds, push for quick gains, such as cost-cutting, buybacks, or asset sales, that may benefit short-term stock performance but potentially harm long-term strategic objectives. The pressure to deliver short-term returns can lead companies to underinvest in research and development (R&D), innovation, or long-term projects, which can have broader economic consequences. However, recent study shows that while some activists may prioritize short-term profits, many focus on long-term value creation, like, better governance, more efficient capital usage, ESG, etc. These contribute to sustainable growth, job creation, reduced carbon footprint and overall economic prosperity.
E. Market Efficiency
Shareholder activism can also improve market efficiency. By identifying undervalued companies or those with poor governance, activists contribute to price discovery in the market. When activists announce their involvement in a company, stock prices often adjust to reflect the anticipated improvements in governance or strategy, thus helping markets more accurately price the value of firms. This allows investors to make better-informed decisions.
F. Economic Implications for Stakeholders
While shareholder activism primarily focuses on maximizing shareholder value, its economic implications can extend to other stakeholders, including employees, suppliers, and customers. Activist-driven changes, such as cost-cutting or layoffs, can have adverse effects on employees and the broader economy in the short term. However, if activism leads to a more sustainable business model, the long-term economic benefits can outweigh these short-term disruptions. For instance, by pushing companies to be ESG compliant activists can help firms mitigate future risks, like regulatory fines or reputational damage, which can affect their economic performance.
Role of Corporate Governance in limiting shareholder activism
Effective corporate governance practices can significantly reduce the risk of shareholder activism by fostering transparency, accountability, and informed decision-making. Key practices that can help prevent shareholder activism include:
Effective Board Composition: A board that brings together a variety of skills, experiences, diversity and perspectives ensures effective oversight and decision-making. Independent directors should be included to provide an impartial view of the company’s operations.
Consistent Shareholder Engagement: Regular communication with shareholders and responsiveness to their concerns builds trust and helps mitigate the risk of shareholder activism.
Comprehensive Risk Management: Companies should implement robust risk management systems to identify and mitigate potential risks, preventing financial losses or negative events that could spark activism.
Clear Stakeholder Communication: Maintaining transparent and efficient communication with stakeholders ensures they are well-informed about the company’s strategy, performance, and challenges, thereby reducing the chances of any rumour or misinformation that might led to activism.
Strong Compliance Framework: A robust compliance framework helps companies adhere to regulatory requirements and avoid legal issues that could lead to shareholder activism.
Transparent Disclosure of Related-Party Transactions: When policies around identifying, approving, and disclosing related-party transactions are transparent, this helps maintain trust and prevent shareholder concerns.
Effective Conflict of Interest Management: Proper management of conflicts of interest, particularly within board composition and related-party transactions, is essential for maintaining corporate integrity.
Commitment to Corporate Social Responsibility: Adopting sound Corporate Social Responsibility (CSR) practices, especially those that further the ESG (Environmental, Social, and Governance) standards, can foster trust with stakeholders and attract ESG-focused investment.
Limitations of Shareholder Activism
Shareholder activism comes with its own share of challenges or limitations. The following are the important limitations:
Short-term Focus: Activist shareholders often seek quick financial gains, which can jeopardize the company’s long-term growth, stability, and strategic vision.
High costs: Shareholder activism can incur significant legal, administrative, and operational costs for both the company and the activists, potentially reducing profitability.
Time-Consuming: Responding to activist demands often requires considerable time and effort from management and the board, slowing down decision-making and operational efficiency.
Management Distraction: Activism may divert management’s focus from core business activities, affecting day-to-day operations and long-term strategic objectives.
Increased Volatility: Activist efforts can create uncertainty, leading to stock price fluctuations and market instability, which may harm the company’s reputation and long-term financial performance.
Prioritizing interests of a few: Activist campaigns may prioritize the interests of a small group of shareholders, potentially overlooking the broader interests of all stakeholders, including employees, customers, and communities.
Potential for Conflict: Shareholder activism can result in conflicts between activists, management, and other stakeholders, disrupting corporate governance and leading to power struggles that hinder effective decision-making.
Challenges and the Road Ahead
As shareholder activism continues to grow, both globally and in emerging markets like India, it is likely to play an increasingly important role in shaping corporate behaviour and driving economic growth. In India, such activism is still evolving, but it holds significant economic potential. The concentrated ownership structures in Indian companies, where promoters often hold a majority stake, pose challenges for minority shareholder, unlike in Western markets, where dispersed ownership allows greater activism. In addition, historically India has had a passive retail investor base. However, as institutional investment grows and regulatory reforms strengthen, shareholder activism is becoming a tool to improve corporate accountability and governance.
The economic benefits of shareholder activism in India are already visible in cases where activist investors have pushed for better capital allocation, more transparent governance, and the resolution of conflicts of interest in promoter-driven companies. These improvements can enhance firm performance, reduce agency costs, and attract more foreign investment, contributing to India’s broader economic growth.
India’s evolving regulatory landscape, driven by the push for transparency, from SEBI, the market regulator, holds promise. SEBI’s guidelines on related-party transactions, independent directors, and shareholder voting rights have empowered investors, particularly institutional ones, to challenge entrenched interests. Running parallel to this is the stricter implementation of the Companies Act, 2013 by the MCA that ensures the protection of shareholders’ rights and overall good corporate governance.
As India’s capital markets mature and retail participation increases, shareholder activism will likely gain further momentum. Proxy advisory firms are expected to continue to play an important role in analysing and providing recommendations to empower investors. The growing emphasis on ESG issues and long-term value creation will also reshape the nature of activism, making it more holistic rather than purely financial.
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