How shareholders are changing corporate governance – the good and the bad
April 21, 2023
You have probably heard of the term ‘shareholder activism’. This refers to actions taken by shareholders of a company to influence the management or direction of the company. Shareholder activism can take different forms and has advantages and disadvantages. We will look at some of these in this article.
Shareholders may engage directly with the company’s management and directors to share and express their views and concerns, as well as encourage the company to take certain actions on issues they consider important. Shareholders may attempt to influence votes on critical issues such as elections of directors or approvals of policies and potential mergers by encouraging proxies from other shareholders or creating a challenge to the management of the company.
A potential advantage of shareholder activism is improved corporate governance practices should positive shareholder activism enhance board accountability, diversity, transparency and responsibility to shareholders. Most investors aim for better shareholder value by encouraging changes in company performance to meet this target.
A potential disadvantage of shareholder activism is pressure to focus on short-term financial gains as opposed to long-term planning and investment, which could affect the long-term growth and sustainability of the company. Activist shareholders driving their own interests and agendas may not be aligned with the best interest of the company and its stakeholders which could lead to conflict of interest and tension. Activists can disrupt the operations of a company, distracting management from their core focus on the strategy and daily business activities which could lead to uncertainty and concerns from other stakeholders in the company.
As mentioned above, positive shareholder activism can have a significant impact on corporate governance and performance if it is used by investors to hold companies accountable for their actions for the benefit of all stakeholders.
Unfortunately, reports of shareholder activism tend to focus on some of its more negative or controversial aspects, portraying the activist’s role as a means of promoting the interests of a minority or even a single investor.
At MM&K, we emphasise the importance of striking the right balance to promote good corporate governance and sustained long-term growth for the benefit of all stakeholders. A clear strategy, objectives and good communication from the Board would help to achieve a collaborative and positive relationship between a company and all its stakeholders. Active engagement is an essential element, as are constructive challenges to hold all stakeholders to account for their commitment to the sustained long-term success of the business. A successful business requires a team effort and the best teams focus on the success of the whole team, not of its individual players.
Should you wish to discuss any aspect of this article, please contact Yolanda Roach.