BackHow to deal with minority shareholders
With minority shareholders getting a greater say in the important decisions taken by companies, it is essential for business leaders to ensure cordial relations with them
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Corporate governance has become an increasingly important parameter by which the managements of companies are judged these days.
New corporate laws being enacted in India empower minority shareholders, including institutional ones, to directly throw a spanner in management decisions that are not perceived to be in their best interest. As a result, even before these laws actually come into force, the voices of minority shareholders are gathering greater power and promoters of Indian companies cannot afford to ignore them any more.
This is clearly brought out by the recent opposition put forth by the minority shareholders of Maruti Suzuki India Ltd to the firm’s plan to become a distributor of cars manufactured directly by the Japanese joint venture partner Suzuki Motor Corp. in India. The question institutional shareholders of the firm ask is that when the Indian firm has the expertise and cash to build and operate a proposed factory in Gujarat, and the marketing network to sell the cars, why does Suzuki need to throw its hat in the ring in India?
The developments of the last few weeks at Maruti Suzuki have had an impact on the firm’s stock price and forced the capital market regulator to look into the matter at the behest of aggrieved shareholders. The company eventually decided to put the matter to vote, needing majority approval from the minority shareholders, and it remains to be seen what is eventually decided. The key thing to note here is that it was public pressure that compelled Maruti Suzuki to take this step even before it becomes mandatory under Indian securities law to do so.
Another recent example of minority shareholders challenging the Indian leadership of a firm is the opposition faced by the promoters of Essar Energy Plc, the London-listed energy arm of the Essar group. The Indian conglomerate, promoted by brothers Shashi Ruia and Ravi Ruia, intends to take Essar Energy private and made an offer of 70 pence per share to buy out the outstanding shares of the firm in the market. Though the minority shareholders and independent directors of the firm feel that the Ruias’ bid significantly undervalues the company, the latter have decided to go ahead with the offer.
With minority shareholders getting a greater say in the important decisions taken by companies, it is essential for business leaders to ensure cordial relations with them. If these shareholders lose faith in the leadership of companies, it might become very difficult for them to execute important strategic plans, which in turn may hamper their firms’ growth.
Here is what some experts think leaders of firms should do to efficiently deal with the minority shareholders of their companies and carry them along in the process of growth.
Tackling shareholder activism
Shriram Subramanian, founder, InGovern
In the face of intense scrutiny from proxy advisory firms, institutional investors and the Securities and Exchange Board of India (Sebi), the management of Maruti Suzuki India Ltd (MSIL) yielded by announcing that the proposal to build a plant in Gujarat through a 100% subsidiary of Suzuki Motor Corp. and source cars at cost will be put to vote by minority shareholders. The management of MSIL had earlier said that they did not anticipate scepticism for the proposal from investors.
MSIL could chose one of at least four ways in which a firm may respond to a situation when there is opposition from minority investors.
• Let minority shareholders decide the outcome of the proposal. This is the path chosen by MSIL. The proposal will only be passed if a majority of minority investors vote for the proposal. This would be truly democratic and fair as it lets shareholders decide the outcome. The onus is on the management and the promoter to make a compelling argument and convince shareholders and let them decide for themselves. This should be the case especially when the promoters have a stake in the proposal, and Sebi has made it mandatory for related party transactions to be put to vote from 1 October 2014.
• Find a middle path which reassures investors that the proposal is fair. For example, MSIL could have said that the cost of the car sourced from Gujarat would be as competitive as its own cost or any other third-party costs, and the costs would be subject to audit by an independent auditor every year.
• Go ahead with the proposal despite opposition. Essar Global Fund Ltd is going ahead with its offer to buy out minority shareholding in the London-listed Essar Energy Plc despite opposition by the company’s independent committee and institutional investors. Many proposals in India—Ambuja Cements Ltd-ACC Ltd restructuring, Sesa Sterlite Ltd amalgamation, etc.—went ahead despite opposition.
• Drop the proposal altogether. The Satyam-Maytas takeover is one of the few occasions when a firm has dropped the proposal after opposition.
Shareholder activism is here to stay in India and companies would do well to evaluate the above four options while taking into account bargaining power and shareholding pattern ahead of bringing out proposals.
BY SUNIL B.S.
Leaders must engage with all
Nishchae Suri, partner and country head (people and change), KPMG India
A leader should take a decision keeping in mind the overall interests of the organization. In any organization, different stakeholders often have conflicting interests and, therefore, decisions taken by a leader sometimes do not meet these varied interests. In such situations, it is imperative that an organization enrols and engages all stakeholders, qualifying why the decision was taken and how it serves the “greater good" of the organization.
Safeguarding the interests of minority shareholders is vital for the long-term success of any organization. Engaging in a dialogue with these shareholders on a continual basis is imperative. Lack of inclusiveness while taking decisions can lead to an agitation from minority shareholders, and represents a fractured relationship between the leaders and the shareholders. This upheaval between them reflects that the damage has been done over a period of time. Prior to taking a decision, a leader should determine the broad impact, highlighting both the positives and negatives that the decision will have on multiple stakeholders, including shareholders, customers, suppliers and employees. Based on this, the leader would be able to develop a meaningful communication plan to ensure there is a buy-in to the decision being taken and overall support for the same. In many cases, information is sensitive and cannot be shared in advance. Here, involving minority shareholders may not be possible prior to taking a decision. However, it is important they understand why that might be the case and how the decision benefits them and the organization. They should feel a sense of involvement and participation in the overall decision-making process of the organization.
With growing awareness about rights of minority shareholders, a single disgruntled shareholder can damage the company’s brand and the firm may have to face financial damages too.
A leader should be sensitive to even a single occurrence of dissonance.
BY MALVIKA JOSHI
Educate the investor
K.G. Vishwanath, independent consultant
Leaders of companies should realize that their primary role is to create structures that will protect all shareholders alike," says K.G. Vishwanath, an independent consultant. Vishwanath joined Jet Airways India Ltd in November 1998 as a management trainee and rose up the ranks to become a vice-president in 10 years, looking after investor relations since the beginning.
He was one of the key members of the Jet Airways team that struck a deal with Etihad Airways PJSC to sell a 24% stake in the former to the United Arab Emirates airline for $379 million. “As professional management, the interest of the minority shareholders is always paramount," says Vishwanath, who was most recently Jet Airways’ vice-president (commercial strategy and investor relations).
Vishwanath says promoters or majority shareholders have representation in management and board, but smaller shareholders (individuals and institutional investors) don’t have that privilege. “They end up relying on the independence of management, auditors and such groups who should be protecting their interests," he says.
The Companies Act has provisions relating to the composition of boards and independence of managements and boards, but many a times, majority shareholders/promoters end up pushing through their own agenda, compromising the interests of minority shareholders, he says. “There should be a rethink in this regard whereby the minority shareholders get the right to appoint directors from a panel of experts identified by the Registrar of Companies or other competent authority (akin to a Public Enterprises Selection Board)," he adds.
He suggests there should also be a policy of rotation of key management personnel in big corporations to ensure that they are not hand-in-glove with promoters and majority shareholders. This will lend a lot of credibility and transparency in company management and, in turn, encourage more broad-based shareholdings in firms.
Also, many chief executives and managing directors do not have formal training in minority shareholder protection and values. “They should have a mandatory checklist which they should follow and the same need to be audited by a public auditor," Vishwanath says.
Though many firms have transparency in management, the system is not foolproof, a case in point being the 2009 Satyam Computer Services Ltd scam (where company accounts were falsified), he says.
Other issues, like the Sahara group case, speak a lot about how promoters and majority shareholders have had little or no regard for the small and minority shareholders’ interests, Vishwanath says. Sahara group chief Subrata Roy is in jail in connection with a case that involves repaying 20,000 crore to millions of small investors.
“There needs to be a complete revamp of sorts. The small investor today is hostage to big institutional investors, market-makers and promoters. They, therefore, end up investing in mutual funds to take care of their interests rather than being a market participant directly," he says. If the market, he adds, needs a broader participation of the retail investor in the India equity story, it has to start trusting the system.
The first step here is to educate the investor, have regular interactions with them (as a group), and maintain significant transparency in the management of the companies.
“Establishing a platform where experts, shareholders, auditors, employees share their opinions, expectations, experiences about the company, and relate that to a score which determines the corporate governance score of the company could be a good start," Vishwanath adds.
BY P.R. SANJAI
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