Shareholders’ activism for better performance of listed firms

Often, shareholders of listed companies do not understand their roles in companies that they have invested in.

This assertion will particularly evident where something has gone wrong with the company, or where there is lack of details about what is happening with such a company, etc. In most of these cases, investors tend to think, it is either the regulators or the stock markets that should play the role. This thinking is both right and wrong — I will explain:

One of the core mandates for the regulator or the stock market, in this context, is to promote investor education, awareness and creating public interest in the capital markets products.

The aim real is to ensure that shareholders gain the necessary skills in line with their governance system to hold the board of directors and management accountable in relation to the manner in which they execute their mandates, as stewards of shareholders/investors interests in the company.

Apart from investor education, regulators and exchanges also have the role of carrying out an assessment of any proposed issuance of securities (shares, bonds, etc) to the public prior to raising capital or listing these securities into the stock market.

Such assessment seeks to establish the extent to which the envisaged offer meets the eligibility requirements for capital raising from the public and for listing into the stock exchange.

Prior to issuance of securities to the public, the issuer is required to prepare the prospectus or information memorandum that provide details of the prospective security and disclosure of the relevant information that will help investors understand the nature of the security on offer, the company behind the security on offer, its strategies, its financial wellbeing, its future outlook, its risks and risk mitigation as well as its governance and control mechanisms.

Through the prospectus, and during the approval process for the prospective issuer’s prospectus, the regulator and the exchange gets an opportunity to sometimes interrogate the company’s board and management as to the facts stated in the prospectus, challenging their assumptions, ask for further details or seek clarification on matters that requires elaborations, require more detailed disclosures (if need be), etc. Once satisfied, the regulator and the exchange will approve the prospectus ready for capital raising and listing of securities.

Up to this stage, the investing public is not so much engaged. Their involvement will start soon thereafter.

Upon approval of the prospectus for capital raising and listing and once the process of capital raising and listing is completed; the company’s board and management are then charged with overseeing that the strategy and operation delivery of the company are in line with indicative disclosures as provided in the prospectus.

The board and management are also charged with an obligation to make public disclosures whenever there is any justified material variation from the earlier disclosed outlook and forecasts/projections.

They are also required to ensure that there are regular updates to shareholders. Shareholders, through the board of directors are required to approve such updates and other material disclosures that has operation and financial nature.

Such updates, by way of continuous listing obligation and/or good corporate governance guidelines, are also reported to the regulator and the exchange.

Furthermore, the board and management are charged with ensuring that there is a sound risk management and controls and that mitigation mechanisms are implemented in timely fashion for smooth business operations.

So, what is the role of a shareholder in all this? I started by indicating that most shareholders tend to think that the regulator or the exchange or both has a key role as to the performance outcomes or governance of listed companies.

The truth is, in many cases shareholders are supposed to contribute to the success or failure of the company to meet its performance and governance expectations. W

hat happens is that many shareholders they lose touch with the company soon as the initial public offering (IPO) process -- both the issuer and the investor have a shared responsibility to this. Nevertheless, shareholders are required to increase their engagement with the company in which they have invested their money soon after the IPO process; why and how?

Shareholders selects the board to represent their interest to the company. As it is, the board, delegates this mandate to management —however the board retains the responsibility of ensuring that there is a smooth business operations and risk management mechanisms throughout the company.

By attending in the general meetings, shareholders get an opportunity to make major decisions impacting their rights, exercising their ultimate control over the company and how it is governed and managed, as well as engaging the company on any other matters of interest to them — this includes selection of the members of the board, appointment of external auditors, approval of audited accounts, etc.

With recent experiences of accounting scandals, fraud and company’s mismanagement in some parts of the world — shareholders are encouraged to approach their investment philosophy with a sense of activism, with pushy investing behavior — for better corporate governance and in creating more value for all shareholders. Activists and shrewd shareholders, compared to passive shareholders, are needed in the current world of investment climate, especially in recent situations where “principal-agent relationship” needs further enhancement.