Shareholder activism: Will the Indian landscape change?

The idea of sustainability is now part of the corporate mandate by all conventions. This is in stark contrast with the conventional mandate of corporations to only maximise the shareholder value.

Even the proponents of conventional wisdom do not deny the idea of a socially responsible corporation. The debate is in the degree of that responsibility; especially when it conflicts with the shareholder interests. Perhaps, the answer lies in finding the primary purpose of the corporation somewhere between the extremes of wealth maximisation and social responsibility. There are several factors that determine that position. Of course, corporate law and policy play a significant role. But the role of shareholders is important too. The participation and activism of shareholders of the company could significantly influence the corporate purpose. After all, companies seek capital at low cost. One of the ways to do so is to keep the providers of the capital content. This way, the debt and equity holders have a stake in the corporate agenda. This is why their ideas of corporate responsibility and the manner of their engagement with the company matter.

Generally, non controlling shareholders are inert and are concerned primarily with the financial outcome of their investment in the company. It may even be unreasonable to expect them to voice concerns about corporate responsibility; especially when it comes at a cost to their return on investments. These non-controlling inert shareholders are ‘rationally apathetic’ towards the broader goals of the company. They would rather exit the company than engage closely with its functioning.

However, there have been instances of activist shareholders engaging closely with the companies to ensure sustainable growth of corporate interests. In 2018, two important (but not controlling) shareholders at Apple Inc.--hedge fund Jana Partners and California State Teachers’ Retirement System (CalSTRS)--collectively pushed the company for the study of iPhone addiction in children. At the time, it made news because hedge funds were known to extract value from the company in the short term. It is true that such instances of shareholder activism for corporate responsibility may still be far and few in number. It may also be true that the motivations of these investors may differ from a theoretical idea of social investment. Nevertheless, the trend is encouraging.

In India, we should particularly be concerned about how such kinds of activism can be enabled. In most of the large Indian companies, issues of corporate purpose and sustainability are not debated as actively amongst the shareholders. A primary obstacle in most of the large Indian companies is that their ownership and control is concentrated. This substantially reduces the scope of active shareholder engagement in Indian companies as such engagement is less likely to succeed in companies with higher share concentrations. Despite legal rights for minority shareholders, active stock markets, and public listing of major corporations, many of the major Indian corporations exhibit little engagement from shareholders outside of the promoter groups. Consequently, even where a few shareholders have ideas on the social responsibility of their companies, they are seldom voiced. Further, due to a lack of active shareholder engagement, the directors are not held as accountable to the shareholders on their social responsibility agenda.

In this light, recent tranches of block investments into Jio by ‘outside’ shareholders are encouraging. While it may not directly and immediately address the aforesaid concerns; given the scale of investments, this could mark a significant trend. The investments at Jio could potentially signal a possibility of strong voices from ‘outside’ and minority shareholders in an entity hitherto promoted by a dominant shareholder.

However, a lot will depend on the implicit and explicit terms of these investments. Since Jio is an unlisted company as of today, some details about these investments are still not in the public domain. If like the shareholders before them, the new investors at Jio decide to stay inert and leave the controlling reigns of the company to the ‘insider’ promoters, it will be business as usual. Instead, if they actively engage with the company, it could usher a new wave of active ‘outsider’ shareholders who will engage with the company to influence the corporate strategy. This could be a small but significant enabling step towards shareholder activism in India. It will be in line with earlier instances of shareholder activism in Indian companies. These include Mistry’s litigation at Tata Sons and voting against non-compete payments of Max promoters in HDFC Life-Max amalgamation. In fact, in 2017, Infosys stated shareholder activism as a risk to the company.

A shift in shareholding culture is important. It will only pave way for investor activism oriented towards corporate responsibility.

To be clear, I do not intend to state that the aforementioned companies are irresponsible or unsustainable businesses. I only use them as progressive examples to draw a broader inference for the general landscape of shareholder empowerment in India.

(The writer is a lawyer and teaches at the School of Policy and Governance, Azim Premji University)