Shareholder activism has acquired a bad name being associated more with corporate raiding than it is with concepts of introducing corporate governance by the shareholders. This is a shame as shareholder activism is the best way to ensure effective corporate governance of a company. The current model gives shareholders the semblance of control at annual general meetings when they get to ask questions about the financials and vote in directors of the board. The reason that this is not real control is that any disparate body of people that does not communicate and internally discuss matters in advance of a group decision will invariably make a bad decision.
I have attended many board meetings of both listed and private companies, as an investor and as a director of the board, and my experience has been that rational decisions were not being made by the shareholders as a group. Let me be clear that each individual shareholder was making decisions that were (usually) rational with respect to their individual goals, but due to a lack of prior communication the end result was a confused mess. As a consequence the board of directors, which is meant to be subordinate to the shareholders, would effectively make decisions on behalf of the shareholders. Again, there (usually) was nothing malicious about this it was just the result of a flaw in the system.
I have previously written about how PE firms can add tremendous operational value to an investee company by actively engaging at the board level. In a similar manner shareholders can create value, or at least avoid the destruction of value, by actively engaging as shareholders. As with any group that wishes to work in a mutually beneficial manner they first must meet each other.
Using startups as an example I have repeatedly seen investors commit to investments without even learning who their fellow shareholders are. I think that it makes sense to at least meet the largest shareholders before making an investment to ensure that you share the same agenda. It also makes sense to ensure that shareholders can easily meet informally without the interference of management. Shareholders should, however, not wait for a crisis to meet. They should meet proactively to ensure the smooth running of the company.
For larger companies, such as listed companies, it might make sense to develop a mechanism for the large investors (say over 5%) publicly disclose their shareholder philosophy. This might include major themes such as views on revenue diversification objects (by product, service, geography, client demographic, etc.), risk levels (debt levels, new market initiation, capital expenditure commitments, off balance sheet exposure, etc.) and main corporate governance principles (board compositions guidelines, board membership tenor, committees, matters reserved for the shareholders, etc.). A sensitive issue, but I believe that the concept that transparency creates value is becoming increasingly accepted.
If this seems like a lot of work, it is. The idea that equity investing involves financial analysis and that alone can lead to profits is a fantasy that needs to be removed from the collective consciousness of humanity. Shareholders who feel that they cannot commit this amount of time to manage their money should accept that they therefore should not manage their own money and should consider hiring a professional asset manager to put in the time and effort on their behalf.
Of course selecting an asset manager that is professional and successful is a completely different story. But that’s for another post.