The Influence of Shareholder Activism on Corporate Decisions

The Influence of Shareholder Activism on Corporate Decisions

There is a need to manage the ownership, control and identity of any corporation in order to maximally harness resources for the corporation’s good and growth. The board of directors or management and shareholders play vital roles in the fulfilment of the corporation’s objectives and visions.

One of the major challenges to the fulfilment stems from the assumption on the different interests between the shareholders and directors, and who bears the full cost of underperformance if the firm visions and objectives go otherwise since the managers are mostly concerned about their salaries, and shareholders are more concerned about their benefits and dividends. It is therefore pertinent to note that even though shareholders’ intervention may improve performance as a result of monitoring the excessiveness of the directors or managers, it could also kill creativity as a result of a hostile or intolerant environment. The influence of shareholder activism is geared towards directors’ accountability which is akin to performance accountability.

Shareholders are one of the crucial parts of any corporation. Although they do not occupy managerial duties, they are pivotal to the corporation’s decision-making process. They provide financial backings that enable the corporation to achieve its goals and vision. Because of the enormous impact and importance of shareholders in any corporation, they also influence corporate decisions through various forms of which shareholder activism is among. Shareholder activism has evolved over the years from using the shareholders’ resolution into the use of media to influence corporation policies and decisions.

Shareholder activism aims at intervening and changing the factors that inhibit the performance of any corporation. They serve as a watchdog to the management on issues affecting the efficiency of the corporation while procuring strategic ways of overcoming challenges confronting it. Shareholder activism cuts across various corporate policy-making processes whether social, financial, environmental, governance, internal culture and building strategic business models.

Over the years, shareholder activism has transitioned from not only being a management watchdog mechanism but a social movement. It uses various methods to achieve its interest such as dialogue during the annual meeting, use of the media, shareholder resolution and litigation. This is based on the notion that shareholders by all means will not want to waste their time and resources without any positive returns. So, in order to be on the safer side, they exhibit various forms of shareholder activism to propel a win-win situation through operational and cooperate efficiency.

Numerous studies have been conducted to examine the efficiency and impacts of shareholders activism on corporate governance as a result of social exposure. Also, studies have shown a positive correlation between shareholders’ intervention and a firm’s growth and productivity. For instance, when shareholders tend to monitor the performance of managers, there is always a change in behaviours in terms of careful consideration of policies that could prevent the firm from underperforming.

Two notable shareholders’ interventions or influences over corporate governance are; the threat to sell their shares in the corporation which will drastically affect the corporation’s stock price and reputation, and also the use of a voting mechanism to directly influence managerial decisions. Thus, giving the management to act based on the shareholders’ interest in order for the corporation not to decrease in value. It is, therefore, crucial to examine the various channels implored by shareholders in influencing corporate decisions:

  • The Use Of Voting To Influence Corporate Decisions

In this context, shareholders activism can also be viewed as shareholders’ democracy. The voting done by shareholders helps to promote transparency in the corporation. The purpose of this mechanism is to promote transparency by providing a new means of expression of shareholders’ voices, and hence to improve corporate governance efficiency.

  • The Use Of Public Campaigns

This is another way in which shareholders express their views on dissatisfaction with the policies and performance of the managers in the corporation. This campaign is implemented by presenting publicized letters directed to the management of the firms.

  • Simple Negotiation With The Management Or Board Members

This is how shareholders settle their dissatisfaction with the management through dialogue on the underperformance of the firms. Issues arising from such discourse include environmental concerns, governance, profit distribution, internal culture and business model.

Furthermore, the impact of shareholders activism on corporate decisions and performance has been the concern of practitioners in the aspect of corporate governance. However, there has not been uniformity of results which some of the studies have attributed to context, methods of shareholders intervention, market-related effects, firm governance and the firm’s internal culture. While firms try to minimize cost and maximize benefits, it is also vital that they solve challenges arising from ownership, control and identity of firms. Studies have recommended three types of mechanisms that can be used to align the interests and objectives of managers with those of shareholders and overcome problems of management entrenchment and monitoring:

  1. One method is the inducement of managers to carry out efficient management by directly aligning managers’ interests with those of shareholders such as direct monitoring by boards and executive compensation plan, etc.
  2. This deal with strengthening the shareholders’ rights, so shareholders have both a greater incentive and ability to monitor management. This approach enhances the rights of investors through legal protection from expropriation by managers e.g., protection and enforcement of shareholders’ rights, prohibitions against insider dealing, etc.
  3. The final method recommended is the use of indirect means of corporate control such as that provided by capital markets, managerial labour markets, and markets for corporate control such as take-overs etc.

In conclusion, the primary goal of any firm is to maximize profits, and shareholders are part of the profit-making and profit-distribution scheme, thus any underperformance of the firm affects the shareholders indirectly, and also the failure to yield to the request of shareholders can also affect the performance of the firms in terms of the reduction in shares. This dilemma has propelled various researches on how shareholders activism affects corporate decisions. Although shareholders activism can bring positive returns, operational and corporate efficiency, excessive monitoring from the shareholders can limit the performance of the managers thereby causing underperformance.

The Society for Corporate Governance Nigeria is a registered not-for-profit organization committed to the development of corporate governance and best practices in Nigeria. We are the foremost institution committed to the development and promotion of corporate governance best practices and aim to be the recognized reference point both nationally and internationally in matters relating to Corporate Governance. Also, we provide a template for formulation and enforcement of corporate governance standards for Nigeria and other emerging economies, using the tools of seminars, trainings, Research and advocacy.

Post a Comment

situs judi bola