Welcome back to our Corporate Governance Weekly Blog! This week, we’re diving into the dynamic world of shareholder rights and activism. Join us as we explore the power and responsibilities of shareholders, real-life examples of shareholder activism, and guidelines for best practices in this realm.
Understanding Shareholder Right
Shareholders, as owners of a company, hold certain rights that empower them to influence company decisions and hold management accountable. These rights include:
- Voting Rights: Shareholders can vote on significant matters, such as electing directors, approving mergers or acquisitions, and adopting major corporate policies.
- Proxy Access: Shareholders can use proxy statements to nominate their own candidates for the board of directors
- Information Disclosure: Shareholders have the right to access relevant information about the company’s financial health, performance, and strategic direction.
- Dividend Rights: Shareholders may receive dividends as a share of the company’s profits.
Shareholder Activism: A Force for Change
A shareholder activist is a person who attempts to use their rights as a shareholder of a publicly-traded corporation to bring about change within or for the corporation.
Shareholder activists typically buy up a minority stake in a company and, subsequently, employ a variety of tactics, from media pressure to litigation threats, to force a conversation and bring about change.
Shareholder activism occurs when shareholders use their rights to influence corporate decisions and governance practices. This can take various forms:
- Engagement: Shareholders engage in discussions with management, raising concerns and advocating for specific changes.
- Proxy Contests: Shareholders may seek to replace existing board members with candidates who align more closely with their interests.
- Resolutions: Shareholders propose resolutions at annual general meetings, addressing issues such as environmental sustainability, executive compensation, or diversity.
Example of Shareholder Activism
- Apple Inc. and Greenlight Capital: In 2013, activist investor David Einhorn of Greenlight Capital challenged Apple’s capital allocation strategy, urging the company to distribute more of its substantial cash reserves to shareholders. His activism led to Apple revising its capital allocation policy, including a significant increase in share buybacks and dividends.
- Procter & Gamble and Trian Fund Management: In 2017, Trian Fund Management, led by activist investor Nelson Peltz, engaged in a high-profile proxy contest with Procter & Gamble. Trian advocated for changes to the company’s organizational structure and operational strategies. While Trian’s candidate narrowly missed a board seat, the contest prompted P&G to implement several changes to enhance shareholder value.
- Herbalife and Bill Ackman: Ackman and his firm, Pershing Square Capital Management, wreaked havoc on the nutritional supplement company back in December 2012, betting a whopping $1 billion against Herbalife on the grounds that it was an illegal pyramid scheme that preyed on low-income people and minority groups.
- Canada Pacific Railway and Bill Ackman: In 2011, Ackman initiated a proxy campaign against Canadian Pacific Railway, campaigning to change the management of the company. In an SEC 13D disclosure in October 2011, Ackman’s hedge fund announced its acquisition of a 12.2% stake in the Canadian Pacific, which later increased to 14.2%. The acquisition made Ackman the largest shareholder, giving him significant influence over the company’s board of directors. Ackman initiated a change in the management and replaced them with another team that he considered more competent. The change in management helped double the share price of the company, increasing shareholder value.
- TWA Airline and Carl Icahn: Icahn bought more than 20 percent of Trans World Airlines’s stock in 1985, and then preceded to take TWA private, enriching himself with a $469 million payment. At the same time, TWA got laden with $540 million in debt. Icahn then sold the airline’s London routes for $445 million in 1991. The sale was “a killer” for TWA, because the London routes were very valuable. The airline went bankrupt a year later.
Guidelines for Best Practices in Shareholder Activism
- Transparency: Shareholders should communicate their concerns openly and transparently, fostering constructive dialogue with management.
- Long-Term Focus: Activism should align with the company’s long-term interests, rather than seeking short-term gains at the expense of sustainable growth.
- Collaboration: Shareholders should collaborate with other stakeholders, including the board and management, to find common ground and solutions.
- Thorough Research: Activists should conduct thorough research to ensure their proposals are well-informed and realistic.
- Respect for Governance Processes: Activists should respect the existing corporate governance processes while advocating for change.
Current Status
Climate change has become a focal point for shareholder activism. Shareholders are increasingly demanding that companies take action to address environmental risks and reduce their carbon footprint. This pressure has led companies to disclose more about their climate-related risks and commit to sustainability goals.
Conclusion
Shareholders play a pivotal role in corporate governance through their rights and potential for activism. By engaging responsibly and constructively, shareholders can drive positive change, holding companies accountable and contributing to long-term sustainable growth.
In our next blog post, we will explore the ethical dimensions of corporate governance, focusing on ethics and corporate social responsibility (CSR). Join us as we examine how businesses can uphold their ethical obligations while pursuing profitability.
As always, we invite you to share your thoughts and experiences related to shareholder rights and activism in the comments below. See you next time!
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