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: Under pressure from global shareholders, NRI billionaire Anil Agarwal-led Vedanta Resources had to abandon the company’s $9.8 billion corporate restructuring plans. Vedanta management’s retreat is yet another example of shareholder activism and the role played in this by market players like hedge funds and mutual funds. Shareholder activism can take many forms—proxy battles, publicity campaigns, shareholder resolutions, litigation and negotiations with management. Such scrutiny gained popularity in the West as management compensation at publicly traded companies posted sharp increases. Various studies have shown that activist investment managers who put direct pressure on companies to improve their performance deliver substantially higher returns; return on assets is about twice as high in the countries with the highest level of equity rights protection, compared with countries with the lowest protection. Last year, the European Corporate Governance Institute analysed returns over six years from the Hermes UK Focus Fund, an activist fund set up by a UK investment institution. It found out the fund generated returns of 8.2% between 1998 and 2004. This was 4.9 percentage points above the FTSE All Share Index. Shareholder activism can be traced 80 years back when Henry Ford chose to cancel a special dividend and instead spend the money on advancing social objectives. The court ultimately took the side of dissident shareholders and reinstated the dividend.
There are lessons for India where shareholder activism is minimal. Some of it has to do with the fact that retail investment in a company, on an average, is just about 10%. The rest is held by promoters and institutional investors, mostly government financial institutions. Neither of these is likely to push for change. Still, there are not enough investor associations to promote the interests of retail shareholders. Mutual fund companies which can take the mantle of shareholder activism are simply not interested because they vote with their feet. Also, most Indian companies lack long-term investors such as pension funds and retail investors are focused on short-term gains. Even private equity investors are too nascent in the market to make any significant impact on the way companies function. Collective shareholder activism can put pressure on companies that have not created value for them by making it difficult to access capital or public funds later. Equity markets have matured in India. Shareholder scrutiny should mature as well.
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