It was shareholder activism that led to the buyout of ABN AMRO Bank, to be split among three investors who jointly staged a takeover on one of Europe's largest banks. View it as good or bad, the point is that’s how powerful shareholder activism can be. In India, however, there is not even grassroots shareholder activism. Shareholders who have, for years, stayed invested in a company where there wasn't even a dividend paid out, have felt shortchanged when the company finally decided to delist. All that they could do when they felt that the price they were being paid by the management was highly disproportionate to the value of the firm, was to write a few letters to the editors.
"Large promoter holdings preclude meaningful activism," says Ajay Bagga, CEO of Lotus Mutual Fund, which manages assets worth over Rs 8,000 crore. The average promoter holding in Indian companies is a little over 50 per cent. While there is little retail investors can do about setting or changing the agenda set by the management, institutional investors come with their own baggage of relationships with other group companies. “There is also the issue of a domestic versus foreign institutional investor schism," point out experts.
One of the tools investment managers have been using to deal with less transparent and value-destructive moves by management is to "vote with their feet" – offload those stocks even if it means suffering losses. This is evident in the fall in share prices of those companies that were perceived to have followed value destructive acquisitions without adequate disclosure to its shareholders.
To quote from a published paper by Prof J.R. Varma of IIM Ahmedabad, on corporate governance: “Mergers are subject to approval by shareholder bodies of both companies as well as judicial review. But shareholder democracy is an empty defence against the dominant shareholder." There is not even a proper shareholder association in India and therefore the retail shareholder involvement is fragmented, says Bagga.
"The return on assets (ROA) is about twice as high in the countries with the highest level of equity rights protection than in countries with the lowest protection," said a research paper by Rajesh Chakrabarti, asst. professor of finance, Collage of Management, Georgia Institute of Technology. This has also been proved in case of specific stocks, which were identified by researchers to have got an average of 10 per cent premium on good corporate governance.
While regulatory framework has already put in place a mechanism to ensure corporate governance, institutional investors are looked upon to play a larger role in this issue and increasingly private equity investors and hedge funds are seen as enhancers of corporate governance especially in guaranteeing better returns. But, Bagga notes, institutional investors show minimum involvement in corporate governance issues.
Consultancy firm Ernst & Young, in its report 'Corporate Governance – Value for Whom and How?', insists that, "it makes more sense for institutional investors to take a more active role in improving the corporate governance environment, instead of being passive by selling stocks under the circumstances of bad governance practices. If a problem does arise, it is important for investors to identify it in its early stages to minimise any loss of value."
Collective shareholder activism can put companies that have not created value for them by making it difficult to access capital or public funds later, says a member of Bombay Stock Exchange who has a proprietary portfolio of Rs 100 crore. "It is impossible for minority shareholders to extract value. We have dealt with several companies that forced us to part with our shares at lower prices, and the same company has come back after five or six years to re-list."
If cost of compliance is high for the company, so is the cost of monitoring corporate governance by institutional investors. Ernst & Young suggests collective action to control increasing costs of monitoring. Bagga suggests sell side research reports and a combination of activism from institutional investors and media to ensure corporate governance. Almost all the listed companies on the National Stock Exchange are fully compliant, says its managing director Ravi Narain. So, in letter, if all of them follow corporate governance, it is only a question of implementing it in full spirit of upholding the rights of all the shareholders.
"Corporate governance ethic must be lived out by the companies on a daily basis to restore market confidence," says the Ernst & Young report in its epilogue.