Should shareholders exercise their rights through activism?

ZimCode Secretariat
Chapter 2 of the ZimCode addresses ownership and control of the company. In a company, shareholders provide risk capital which the management controls under the leadership of a Board of Directors.

The ZimCode in sections 14-17 highlight that the shareholders have rights to influence the direction of the company by voting for or against certain principles during the Annual General Meeting (AGM) and such other occasions where they have to exercise their rights.

Shareholders can exercise their rights in terms of the statutes of the company such as company constitutions, as afforded on the share certificates, memorandum of association, articles of association and as guided by the law. The ZimCode reserves certain rights exclusively for shareholders. Shareholders also have additional governance responsibilities such as reviewing the performance of the board and taking action if they believe that performance is not up to expectations, this may include removal of directors. Shareholders as a subset of other stakeholders have the rights to hold the boards to account.

However, this traditional view that directors would do as instructed by shareholders and that the shareholders have unanimous grip on the company has long disappeared. After the 20th century, this view had been altered to the effect that the board were capable of exercising powers independently from shareholders. When the board flexes its muscle the shareholder has to react but the nature of reaction depends on many factors.

In some instances, shareholders are not interested in using the powers conferred to them by the articles in holding the board to account. They argue that the time and effort required by shareholders to hold management to account did not make it worthwhile. The alternative of accepting takeover bids or selling shares which are easily sellable on the free market provided a trouble-free solution to some shareholders.

Others have placed emphasis on the need for institutional shareholder ‘voicing’ their concerns rather than exiting.

The ‘voicing’ can take many forms that are enshrined under the banner of shareholder activism. In simple terms, shareholder activism is the way in which shareholders can assert their power as owners of the company to influence its behaviour. Activism covers a broad spectrum of activities. Activism includes “voting with ones feet” (exit), private discussion or public communication with corporate boards and management, press campaigns, blogging and other e-ways of public “naming and shaming”, openly talking to other shareholders, putting forward shareholder resolutions, calling shareholder meetings and ultimately seeking to replace individual directors or the entire board.

The primary emphasis of activist shareholders has been to focus on the poorly performing firms in their portfolio and to pressure the management of such firms for improved performance, thus enhancing shareholder value.

Effectiveness of shareholder activism has been noted in Japan, UK, USA and India but much less in Africa because shareholder activism is also influenced by political and economic forces.

Shareholder activism is still a controversial topic. Proponents believe they are fire brigades, while their opponents see them as disruptive forces that weaken strong companies. At times shareholder activism can actually be costly to the shareholder. There are also policies that bar the shareholder from ‘over interference’ with management which may reduce their activism to a mere show.

Shareholder activism can prompt small changes in target firms’ governance structures, but has negligible impact on share values and earnings. After considering these shortfalls, at times shareholders have to work with other options.

Aggrieved shareholders may consider improving the internal governance systems by working on the shareholder governance proposal and compel the board and management to report mid-term to the shareholder.

The ZimCode does not take a position on whether shareholder activism in its various forms should be encouraged or condemned but constantly highlights that the company should ensure that there is value creation on the shareholder’s investments. The ZimCode has already catered for the rights of the shareholders in many sections of the code, (chapter 5 and 6, Information Management and Disclosure; Corporate Conflict Prevention and Resolution), and yet some shareholders are not interested in exercising those rights.

Taking a cue from the corporate scandals that have been experienced in the country, majority of the shareholders shied away from confronting their boards and management concerning those matters.

Shareholders who have the capacity to organize themselves and convince other interested parties such as investors to stop the board and management from making decisions that affect their interests chose not to use those avenues. This speaks volumes on how the shareholders prefer to exercise their rights.

It cannot therefore be concluded that activism in its entirety is something that the shareholders are going to easily grab as a viable route to introduce change.

Considering the controversy that still surrounds shareholder activism and the lack of will power from many shareholders to actively confront its management, in our context, shareholder activism remains a theory that is discussed in corporate circles.