Column: Maruti lessons

Mar 22 2014, 03:14 IST
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SummaryTo deal with shareholders’ activism, Indian companies need to actively engage with them before taking decisions

The recent attempt by Maruti Suzuki India Ltd (MSIL) to subcontract manufacturing to a 100% subsidiary of Suzuki made headlines, with several investors—including mutual funds—alleging that investors stand to lose several thousand crore of rupees as a result of this action as it will hollow out potential profit streams of the parent company, Maruti Suzuki. Demonstrating unusual aggression, these investors approached the MSIL board and warned of invoking the minority oppression regulations of Companies Act. Reacting to these actions, the board agreed to seek the approval of minority shareholders and to ensure that no extra profit would be made by the Suzuki subsidiary.

Such shareholder activism is a relatively recent trend. With increasing market efficiency, it is no longer easy to obtain bumper profits, leading investors to use more direct means to influence companies to act on their behalf. Instead of speculating about future performance of the company they have invested in, these activists are trying to change future performance. The financial services sector-led crisis of the recent years has created a sense among the investors that company (and bank) managements are not always right. Simultaneously, we seem to be reaching an inflection point in society with citizens beginning to ask more of people in public life. Activism among investors is just one manifestation of these trends.

A new ecosystem nurturing this kind of activism is also being created. The United Nations Environment Programme has established the so-called “Principles for Responsible Investing”. Over $35 trillion, under management of pension funds, insurance companies and mutual funds, has been signed up to honour principles which include disclosure of how these bodies will vote on shareholder resolutions, their commitment to investing only in companies that believe in sustainability and agreements to force their investees to increase disclosures in areas like water utilisation, hazardous chemicals control, etc. A similar forum has been created by Experts In Responsible Investing, who now routinely publish reports which comment on the long-term sustainability performance of the top-2000 companies in the world. It will come as quite a surprise to many that the otherwise forward-looking companies, Apple and Google, have scored fairly poorly in these ratings. It is a matter of only a few years before such ratings become common in the larger public domain, including within annual reports, equity research reports, etc, with concomitant consequences on company reputation.

The kind of activism displayed in the Maruti case

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