Shareholder Activism Essay

Can sh arholder activism actually deliver the desired change? IntroductionThe increasing awareness of shareholders and their level of importance to the modern make-up pay off raised multiple questions as to the potential single-valued function which shareholders stinkpot play in influencing the decision making of the direction team and their willingness to engage with a broad range of stakeholders. Where shareholders have an impact to any degree, this is referred to as shareholder activism and is largely described as being the role that shareholders play in ascensive the decisions made by management teams (Bainbridge, 1995). Whilst it is readily accepted that shareholders own the company, whereas directors manage the company, there has historically been a misapprehension that shareholders are simply interested in the financial profits that the company produces. It is argued in this paper that this is not the case and shareholders are becoming practically more involved in ensu ring a match approach and that organisations have a wider awareness of issues much(prenominal) as corporate social responsibility (Schacht, 1995). The purpose of this paper is to consider whether or not this casing of shareholder activism can actually be seen to be delivering a positive change, specialisedally in the area of corporate social responsibility. In enact to guess at this issue and the development of CSR, shareholder activism in its entirety needs to be looked at, before then considering the legal regime which encourages such activism and any specific cases that are relevant, before drawing conclusions on the constitute question.Shareholder activism the Theoretical PerspectiveThe management of an organisation has, for a long time, accepted that the performance of a business is down to them and that, if the shareholders are unhappy about the performance or the returns of the business they may potentially walk away from the organisation or the put of the manager ma y be in jeopardy. Where shareholders take this type of action on board, it can be suggested that shareholder activism is in operation. Broadly speaking, there are several key reasons why which investors may pursue the shareholder activist approach.Firstly, shareholder activism occurs in outrank to procure a better return on shareholder investment secondly, to ensure that the company pursues a different corporate strategy that will finally improve performance and profit readiness, a key fashion model of this being the suggestion that the company should demerge thirdly, to make changes in the management team fourthly in order to pursue some form of special interest, such as a social and ethical agenda (it is this agenda which will be looked at in more detail in the paper below). Finally, shareholder activism is undertaken to influence the outcome of some form of corporate agenda that has already been pursued (Tarrow, 1994).Shareholders have always had the option of essentially vot ing with their feet, when they disapprove of the decisions of the management team. For example, they can simply sell their shares, where traditionally the criticisms of management decisions would take place in private, with shareholders simply moving away when they were displeased. Although the concept of shareholder activism is not inevitably new, in recent years, it has certainly increased in its operation and become much more prevalent.Examples of recent shareholder activism include action by an institutional investor, Knight Vinke Asset Management which lobbied for changes in the HSBC strategy, or in Tesco where shareholders became involved in necessarying changes in working conditions relating to clothes suppliers in Asia. Interestingly, shareholder activism does not count on on the size of the market, with shareholder activism being a tool that can be utilize in any type of organisation. Those holding shares are likewise potentially able to act in this way and therefore t his lends a considerably more diverse meaning to the notion of shareholder activism, which can be derived from a much broader range of sources (Roe, 2003).With this potential diversity in mind, the next step is to look at the tools that are available for the activist shareholder and to delineate the statutory basis upon which such action can take place.Legal BasisOne of the key statutory powers which are available in order to support shareholder activism is that of the Companies Act 2006 (the Act). This Act lays down the legal framework which enables a shareholder to exercise any of their legal rights when they are pursuing an activist agenda. The precise options available to the shareholder will depend on the type of company in which they hold shares for example, there are different rights attached to public companies. For the purpose of this analysis, all potential legal rights will be looked at and it should be borne in mind that these may not always be available, oddly to sha reholders of private companies (Warneryd, 2005).In accordance with sections 303 to 305 of the Act, shareholders are able to call a general collision. This is a strong element of the shareholder activism as it provides members with a broadcast in which they can make their requirements known. In the aftermath of the Shareholder Rights Directive 2009, members and groups of shareholders representing a minimum of 5% of the public companies voting rights are able to require that the directors call a general meeting of the company. Similarly, where the directors choose to convene a general meeting there are rules associated with giving notice to the respective(prenominal) shareholders. This allows shareholders the hazard to bring a platform upon which to discuss their own issues.Secondly, in accordance with sections 314 317, members with a shareholding of at least 5% or shareholders or that have at least 100 shares with an average of at least ?100 per member are entitled to demand th at the company circulates a statement to shareholders of up to 1,000 actors line regarding a profferd resolution or any other business that is going to take place at the meeting. This again provides the shareholders with the information that they need in order to be potentially active. It is similarly noted that beneficial owners of shares can count towards the threshold in order to meet the 5% trigger (Belloc and Pagano, 2009).As swell as the ability to gain access to the meeting and information in relation to the meeting, shareholders are also entitled to be active within the meeting itself. In accordance with section 338, shareholders holding a total of 5% shares can propose a resolution, a strategy that was used by the investor cost-efficient capital structures but they required a resolution as part of the 2007 AGM of Vodaf wizard plc to pursue a specific strategy. Furthermore, section 168 provides shareholders with the ability to propose the removal of the directors. Argua bly, this is one of the greater sanctions available to shareholders, from the perspective of the individual directors. Where this process is being initiated, special notice of 28 days must be given of the intention to propose this resolution and to reasonably work in line with the articles of association of the company (Filatotchev, et al 2006).Importantly, section 116 of the Act allows any shareholders to gain access to the shareholder picture which then may offer them the opportunity for the shareholders to join forces in order to deal with a particular agenda, making the ability to reach the 5% thresholds close to easier. There are, however, requirements for shareholders to ensure that when they are canvassing support they are doing so for the proper purpose.There are certain thresholds which allow shareholders to have rights, with 5% fling the opportunity to propose a resolution, to require an independent report in the case of quoted companies, the power to require companies to publish audit concerns, again in quoted companies, and also the power to include a matter that should be considered at AGM. When the required percent of the shareholders join forces, the power becomes much more threatening to the management team, as this is the requisite amount required a specific resolution. For example, at 75%, the shareholders can require a special resolution to be passed.The regime associated with proxies can play a very important role when it comes to shareholder activism with the 2006 Act making changes as to the way in which proxies can operate, allowing the property to be much more effective. For example, members have an absolute right to appoint a proxy who can attend a meeting and vote on their behalf.Another key area of shareholder activism emerged from the ability to use corporate representation, rather than using a proxy, as this allows shareholders a much greater degree of practical tractability when they are unable to comply with proxy deadlines, or some other form of formality. corporeal shareholders are also able to appoint representatives by faithfulness of their own board resolution.Finally, it is cost noting that shareholders rights can be utilised by indirect investors. For example, under the 2006 Act, it is possible for the beneficial shareholders holding shares to enjoy information rights, i.e. to run information in relation to the company and in many cases the beneficial shareholders can count towards reaching the 5% thresholds. Although this goes beyond the scope of the discussion here, it is worth noting that these beneficial shareholders can have a direct impact on any agenda for shareholder activism.Examples of Shareholder ActivismIn order to gain an understanding of secure how effective these legal provisions can be, the situation in Tesco can be looked at. In 2007, the poverty charity War on Want used the fact that it held a 5% shareholding in order to present a resolution at the 2007 AGM, with a view to ensuring a better deal for suppliers, in particular across Asia. The matter did not rest there and in June 2008 Tesco was targeted once again by a group of shareholders who were headed by an individual high- profile shareholder, to look at the living conditions of chickens, prior to their purchase by Tesco for sale.The shareholders in both these cases used section 338 of the Companies Act 2006, in order to demand resolutions relating to their individual issues. Once this resolution had been demanded, the company was required to circulate information relating to the resolution, as well as any supporting statements (Aguilera, 2005). This type of shareholder activism was seen to be flourishing in these individual cases and provided a realistic forum for the shareholders with a relatively minimal percentage to change the strategy and activities of the organisation itself.Tesco is not alone in facing these types of issues and many other large companies have also faced action from mini mal shareholders, relating to specific issues such as wages for staff or supplier issues. This shows a clear indication of the willingness of shareholders to become much more active in putting their points forward and being willing to take on corporations by forcing resolutions to be placed and information to be provided to the broader shareholding (Hendry et al 2007).Analysis and ConclusionsThe question presented here is to consider whether or not shareholder activism can truly have an impact on organisations, when it comes to encouraging changes and improving corporate social responsibility within the organisation. By looking at the history of shareholder activism and the way in which shareholders are becoming much more willing to engage in the operation of the company, as well as examining the provisions of the 2006 Act which provide shareholders with the ability to undertake these activities, it is argued here that shareholder activism is a growing and real threat to management teams of all sizes.In particular, the 2006 Act offers a considerable opportunity for shareholders to demand information and to have certain items discussed at the AGM. By merely providing this platform for discussion, shareholders can become more active in order to ensure their last-ditch agenda is not pursued. By looking at this and using a company such as Tesco as an example, it can be seen that groups of shareholders are gaining real attention and are able to have a direct and dramatic impact on the decisions made by the management teams, particularly when faced with the ultimate sanction that shareholders can request the removal of those directors who fails to comply (Gillan and Starks, 2000).It is concluded here, therefore, that shareholder activism is a real and direct method whereby shareholder groups can encourage changes in the strategy of the organisation relating to both corporate, social responsibility and any other relevant issues.ReferencesAguilera, R.V. (2005) Corpor ate governance and director accountability An institutional comparative perspective British Journal of Management, 16 S39S53.Bainbridge, S. M. (1995) The politics of corporate governance, Harvard Journal of Law and Public Policy, Vol. 18 (3), pp. 671-735.Belloc, M. and Pagano, U. 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