Shareholder activism: A balancing act

The rise in shareholder activism, as seen in the case of Tata Motors Ltd last week when shareholders rejected the proposal to hike senior management salaries, points to the delicate balance companies must strike between meeting shareholders’ approval and safeguarding the company’s interests. Three experts Mint spoke to believe the answer lies in increased engagement between the company and its shareholders.

Shareholders should be just, fair

Ramesh Swaminathan, chief financial officer, Lupin

There is a rise in shareholder activism when it comes to upholding governance norms, says Swaminathan.

Any attempt to pay senior management more than what is in line with the company’s performance is not going to be appreciated by shareholders, he says.

“What is happening in India Inc. is in tune with what is already happening across the globe, where remuneration is more in line with earnings,” he says.

Though the new Companies Act is in favour of shareholders finding their voice, the increase in activism is an attempt by shareholders to have a say in the running of the company.

However, this does not mean the management is wrong in putting across its point, believes Swaminathan, but the remuneration proposed should be in a manner that is acceptable to shareholders. Companies should remember that it is not unfair that shareholders reject their proposals, because at the end of the day the management exists to increase shareholder wealth, he says.

At the same time, it is also unfair of shareholders to deny fair competitive remuneration to the senior management based on the current performance of the company as well as the market scenario.

Shareholders need to keep the long-term performance of the company in mind, because if companies don’t pay an attractive salary, top executives will leave. It is a delicate balance, says Swaminathan.

Need to benchmark compensation

Shriram Subramanian, founder and managing director, InGovern Research Services

Tata Motors may not have foreseen that the three proposals it placed before shareholders to ratify excess remuneration paid to directors and the former managing director would be rejected by shareholders, says Subramanian.

There was a high level of shareholder participation as over 66% votes were polled, with 64% institutional investors and 41% retail investors voting against the proposals.

Subramanian says the total amount of excess remuneration, 20.28 crore, seemed inconsequential when compared with the consolidated balance sheet and profits of the company.

“Executive compensation to senior management should be based on size, complexity and profits of a corporation. Shareholders understand that even if the company does not make profits, to attract good management talent, the company will have to pay market-linked compensation,” he notes.

However, he says, executive compensation should be benchmarked to peers and be linked to financial performance. “Also, there should be no increase in remuneration in case of decline in financial performance. Compensation for promoter directors should not be more than the highest paid company non-promoter executive and should be paid out as dividend, which gets shared with all shareholders,” Subramanian argues.

Awareness and activism are key

Rajesh Chakrabarti, clinical associate professor (public policy) and executive director of Bharti Institute of Public Policy, Indian School of Business

The Tata Motors episode is a welcome development in the corporate governance evolution in India. Indian businesses, particularly conglomerates or business groups, have a history of taking minority shareholders for granted, says Chakrabarti.

The central problem of corporate governance in India, as opposed to say in the US, is “horizontal”, i.e., exploitation of minority interests by shareholders with a controlling stake, rather than “vertical”, i.e., exploitation of shareholders by management, he adds.

Ironically, this happened for a group that has, deservedly or otherwise, a high reputation of corporate governance and fair play, suggesting that no company is now beyond minority shareholder scrutiny and reputation is no safeguard against shareholder activism, says Chakrabarti.

Without commenting on the specific case, he says that it is true that by and large executive compensation in India is also rising towards unreasonable levels in recent years and companies generally get away with astronomical CEO payments even in years of poor performance. “Shareholder awareness and activism are the only insurance against such moves and a few visible

cases like this one can send a strong message for major businesses,” says Chakrabarti.