AI Insights

Corporate Governance: Shareholders Interference in the Revenue Model

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This post has been authored by Shwetha Vincent and Anjan Kumar, Research Analyst Interns at Arthashastra Intelligence

The traditional idea of responsibility was that the businesses had a responsibility to make profits. Shareholders initially did not expect much from businesses other than legal profits. However, that was not a sustainable model. As businesses became larger, there were more people who would be affected by its decisions. These people could be within or outside the organization. Hence, the need to engage with all stakeholders of the business became imminent. Shareholder activism originated because of the difference between the firm’s goals and the shareholders’ expectations. This discrepancy caused shareholders to use their ownership of the firm to be heard by the executives. Shareholders have begun to use sophisticated systems of engagement to maximize their rights as owners to demand information from the firm. They wish to know where and how their investments are being utilized. After all, it is their money upon which the firm is run. This consciousness is slowly but surely changing corporate behavior. Shareholder-centric ideology is changing corporate governance systems around the world.

In India, shareholder activism, while in nascent stages, is still gaining traction. Take, for example, the case of Either Motors Limited. Siddhartha Lal was to be reappointed as its Managing director, but shareholders were against the proposal to increase his salary by 10% as it outpaced revenue and profits growth during the cover pandemic. Institutional shareholders have taken the lead in activism, with a drastic spike in institutional investors voting against board resolutions Mutual funds, pension funds, insurance companies, foreign portfolio investors are asserting themselves as important stakeholders of the company. The new corporate governance law in the Companies Act 2013 has bolstered these efforts.

The bounty of information available to investors, as well as the significant role played by proxy advisory firms, has led to this surge of shareholder activism. Shareholder activism increases the accountability of management and transparency in company affairs. The result is that companies are forced to adopt stringent measures regarding corporate governance as well as shareholder-friendly policies. The increased amount of scrutiny is causing companies to be prudent about their actions. For instance, Maruti Suzuki announced that it would set up a Greenfield project in Gujarat. This was met with resistance from its shareholders, as they had not been consulted about this. Eventually, institutional investors in Maruti vehemently opposed the transaction and the project proposal had to be amended to gain shareholder approval. While this sort of scrutiny has its upsides, it can also cause delays in taking decisions. For instance, the aforementioned Maruti project had to be delayed by a year.

The increasing influence of institutional investors, paired with a wider range of actions that necessitate shareholder approval, has led to a change in the culture of corporate governance. Factoring this with the new reforms introduced in the Companies Act, India’s corporate landscape is headed for many changes. While shareholder activism has made a lot of progress, the only concern is regarding minority shareholders. If promoters have a larger number of shares, minority shareholders\’ opinions can easily be discounted. Regardless, management must prepare for tremendous changes in the face of shareholders finding their voice and making themselves heard.

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