Rising Shareholder Activism In India: A Step Towards Improving Corporate Governance

Shareholder activism involves the efforts of shareholders to make a desired change in the company’s workings. While most mature markets have strong shareholder activists who fight for the rights of minority shareholders, Indian minority shareholders struggle to make their voices heard.

The earliest (and crudest) form of shareholder activism first emerged in the USA, with the rise of corporate raiders. These raiders emerged as a counter-force in the 1970s, when managements ran conglomerates like their personal fiefdoms.

These managements often pampered themselves with huge pay packages and comfortable retirement packages (golden parachutes). While some corporate raiders simply threatened managements with takeovers and forced corporations to buy back their stock, other raiders took complete control of the company and focussed on creating a leaner structure.

Over time, these raiders managed to shed the “raider” tag (with considerable PR efforts) and created an activist shareholder image. Despite the criticism aimed at them, several studies show that these activist shareholders brought in financial discipline and purged management excesses in American corporations.

Recently, the issue of shareholder activism came into focus when the 10 per cent salary hike of Eicher Motors Managing Director and Chief Executive Officer, Siddhartha Lal, was opposed by other shareholders.

The company’s revenues have fallen from Rs. 8,965 crore in fiscal 2018 to Rs. 8,720 crore in fiscal 2021. Operating margins too, fell from 31 per cent in financial year (FY) 2018 to 20 per cent in FY21.

The pushback by shareholders came amid the criticism of several automakers whose managements had been taking salary hikes despite having been impacted by the pandemic.

Other auto companies have also faced similar troubles recently. For instance, Hero MotoCorp has been struggling to grow its revenue. Sales have fallen from Rs. 32,458 crore in 2018 to Rs. 30,959 crore in 2021.

Yet, promoter and MD, Pawan Munjal, will take home a pay of Rs 95 crore in FY22, a hike of 10 per cent.

In addition, Hero MotoCorp also buys raw material from the promoters’ group companies. The salary hike resolution was passed with a 60 per cent approval rate, with 78 per cent of institutions voting against the resolution.

Back in 2018, Neeraj Kanwar, promoter and MD of Apollo Tyres, faced shareholder ire after continually increasing his salary, despite the company’s faltering performance.

Minority shareholders voted against the increase, and the management was forced to lower its remuneration.

But shareholder activism in India has been relatively rare. Most listed companies in India are run by promoter families. These families own a majority stake and look over the operations.

The strong promoter shareholding helps controversial resolutions pass through unhindered.

In contrast, most USA-based corporations do not have owner-operators. The absence of a majority stakeholder makes it easier for shareholders with small stakes to bring in the desired changes to the corporation.

Probably, the only episode of shareholder activism unlocking real value was the case of GESCO. GESCO had valuable assets. But the stock traded at dirt cheap valuations in the markets.

Yet, the company was not ready to take any decision that would unlock shareholder value. Abhishek Dalmia, a member of the Dalmia family, threatened to take over the company and launched an open offer.

After much deliberation, the promoters launched their own open offer that rewarded the shareholders handsomely. However, this is a rare case where promoters were forced to bend backwards and accommodate shareholder needs.

Nevertheless, minority shareholders in India, especially institutions, have taken up the initiative to make Indian promoters more accountable.

Theoretically, promoter-run Indian companies should not have the usual conflict-of-interest between managements and stockholders. However, Indian promoters want the best of both worlds.

So they often pay themselves huge salaries, while simultaneously earning through dividends and buybacks. The salary provides a safety-net in case the company is unable to pay out dividends.

The Companies Act 2013 limits management remuneration to 11 per cent of the company’s net earnings. But, quite often, managements take home a much higher pay, without the permission of the Central government or shareholders.

Some promoters often use shady tactics to take home a high pay without having to face objections from shareholders.

For instance, a Madhya Pradesh-based listed alcohol company classified its Chairman and his subordinate, both promoters and brothers, as employees rather than directors.

This manoeuvre allows them to take home almost 30 per cent of the company’s profits in the form of salary without having to worry about shareholder outrage.

Yet, high remuneration is the least of investors’ worries. Often, promoters engage in obscure (and often unfair) related party transactions to siphon off cash from the listed company.

These often appear in the form of raw material purchase from promoter group companies, mergers with group companies, consultancy fees, and donations to promoter-run foundations among others.

While it is easy to detect unfairly high promoter remuneration, determining whether such related party transactions are fair, is quite difficult.

Given their high shareholding in companies, Indian promoters should receive money through dividends rather than through high remuneration.

This would completely align promoter interests with shareholder interests. In case of companies that cannot pay out dividends, promoter remuneration should be linked to company performance rather than being decided arbitrarily.

Usually, companies run by professional managements have fairer remuneration policies in India. Independent Directors must also focus on protecting minority shareholder rights, rather than being complicit in the promoters’ misdeeds.

Independent directors have always sided with promoters rather than focusing on their moral obligations to shareholders. After all, not many would leave a comfortable and well-paying job to fight for justice.

Unfortunately, most of shareholder activism and research has been focused on larger companies. Smaller companies do not have a strong institutional presence, making it quite difficult for minority investors to oppose the management.

Some large companies have also filed lawsuits against investors, bloggers, and advisory companies in order to quieten dissenting voices. Such actions will only reduce management accountability further.

In recent years, institutional advisory agencies that focus on corporate governance have also become an important part of the ecosystem.

Companies have also realised that transparency and honesty help in lowering the cost of capital.

Firms like Vedanta, Zee Entertainment, and United Phosphorus, and several others trade at lower valuations compared to peers who have a better governance track record.

The rise in shareholder activism is an extremely important step in making companies more accountable to shareholders.