Shareholder Activism and Corporate Governance

Introduction

In modern corporate law, shareholder activism has emerged as a significant force shaping corporate governance and accountability. Traditionally, shareholders were seen as passive investors whose role was limited to voting during annual general meetings. However, in recent years, shareholders have begun to actively influence corporate decision-making by questioning management practices, demanding transparency, and advocating for ethical and sustainable governance.

The rise of shareholder activism is closely linked to globalization, increased institutional investment, and enhanced awareness of corporate responsibility. In India, while the concept was initially slow to develop, recent reforms in the Companies Act, 2013 and SEBI (Securities and Exchange Board of India) regulations have strengthened the position of shareholders in promoting good governance. This article examines the nature, evolution, and legal framework of shareholder activism in India and its implications for corporate governance.

Understanding Shareholder Activism

Shareholder activism refers to efforts by shareholders to influence a company’s policies, management decisions, or governance practices. Activism may take different forms such as proxy battles, public campaigns, shareholder resolutions, litigation, or dialogues with management.

The key objective is to ensure that management acts in the best interest of shareholders and the company. Activist shareholders often focus on issues like board independence, executive remuneration, corporate social responsibility, and environmental sustainability. In India, both institutional investors and minority shareholders have begun using activism as a tool to demand accountability.

For example, in Tata Consultancy Services v. Cyrus Investments Pvt. Ltd.,the Supreme Court of India discussed the rights of minority shareholders and emphasized the importance of corporate democracy and board accountability. Although the Court upheld the decision of the Tata Sons board, the case marked a major turning point in India’s corporate governance discourse and showed how shareholder conflicts can reshape governance norms.

Legal Framework Governing Shareholder Rights

The Companies Act, 2013 provides a statutory foundation for shareholder rights and participation in governance. Under Section 100, shareholders can requisition an Extraordinary General Meeting (EGM) to discuss urgent matters affecting the company. Additionally, Section 188 mandates board and shareholder approval for related party transactions, ensuring transparency in management decisions.

The Securities and Exchange Board of India (SEBI) also plays a vital role through its Listing Obligations and Disclosure Requirements (LODR) Regulations, 2015, which require listed companies to maintain transparency and timely disclosure of material events, empowering shareholders with information.

Further, SEBI has introduced reforms such as e-voting, mandatory board independence, and whistleblower protection, indirectly strengthening shareholder participation. Institutional investors like mutual funds and insurance companies are guided by the Stewardship Code, 2020, which encourages them to engage with company boards on governance matters.

Forms of Shareholder Activism

Shareholder activism can be categorized as follows:

1. Corporate Governance Activism – focuses on improving board structure, ensuring independent directors, and enhancing audit mechanisms. For instance, activists may demand the removal of directors who fail to uphold fiduciary duties.

2. Social and Environmental Activism – shareholders advocate for sustainable practices, reduction of carbon emissions, and better labour policies, aligning with global ESG (Environmental, Social, and Governance) trends.

3. Strategic and Financial Activism – activists challenge mergers, acquisitions, or capital allocation policies that may harm shareholder interests. Institutional investors in India often question executive pay or dividend policies that appear unjustified.

4. Litigation and Legal Action – under Section 245 of the Companies Act, 2013, shareholders can file class action suits to seek redress against mismanagement or oppression. This collective legal tool strengthens shareholder activism.

Role of Institutional Investors

Institutional investors including pension funds, insurance companies, and mutual funds play a crucial role in advancing activism. Their financial power and professional expertise allow them to influence management decisions effectively.

The SEBI Stewardship Code mandates institutional investors to monitor and engage with investee companies, disclose their voting policies, and report engagement outcomes. This framework promotes long-term governance improvement and reduces management–shareholder conflicts.

A notable example is the Infosys governance controversy (2017), where institutional investors demanded greater transparency from the board regarding executive remuneration and ethics. Their intervention led to improved corporate disclosures and stronger accountability.

Challenges to Shareholder Activism in India

Despite progress, shareholder activism in India faces hurdles such as:

1. Limited awareness among minority shareholders regarding their rights;

2. Concentrated ownership in family-run businesses reducing shareholder influence;

3. Lack of coordination among institutional investors;

4. Regulatory hurdles like lengthy litigation and weak enforcement mechanisms.

Moreover, excessive activism may disrupt management autonomy and hinder long-term business planning. A balance must thus be maintained between shareholder participation and managerial independence.

Shareholder Activism and Good Corporate Governance

Shareholder activism enhances corporate governance by ensuring accountability and transparency. The OECD Principles of Corporate Governance define governance as the system by which companies are directed and controlled to ensure efficiency, fairness, and responsibility.

In K.S. Puttaswamy v. Union of India, the Supreme Court observed that transparency and accountability are essential elements of good governance, which equally apply to corporations. Thus, responsible activism ensures ethical conduct, compliance, and stakeholder protection.

Activism aligns management decisions with long-term shareholder value, bolsters investor confidence, prevents fraud, and ensures adherence to statutory obligations making it integral to sustainable corporate growth.

Conclusion

Shareholder activism represents a shift from passive ownership to active participation, ensuring that corporations remain transparent, responsible, and aligned with the interests of their shareholders.

With support from the Companies Act, 2013, SEBI regulations, and judicial recognition, activism in India continues to expand. However, to strengthen its effectiveness, greater investor awareness, regulatory backing, and collaborative engagement among shareholders are essential.

Ultimately, shareholder activism serves as the cornerstone of democratic corporate governance, balancing power between boards and shareholders, while upholding corporate integrity and accountability.

References

1. Life Insurance Corporation of India v. Escorts Ltd., (1986) 1 SCC 264 (India).

2. Tata Consultancy Services Ltd. v. Cyrus Investments Pvt. Ltd., (2021) 9 SCC 449 (India).

3. ICICI Bank Ltd. v. Official Liquidator of APS Star Industries Ltd., (2010) 10 SCC 1 (India).

4. National Textile Workers’ Union v. P.R. Ramakrishnan, (1983) 1 SCC 228 (India).

5. Union of India v. Association for Democratic Reforms, (2002) 5 SCC 294 (India).

6. Ministry of Corporate Affairs, Government of India, Report of the Committee to Review Offences under the Companies Act, 2013 (2018).

7. Organisation for Economic Co-operation and Development (OECD), Principles of Corporate Governance (2015).

8. Varottil, Umakanth, Minority Shareholder Protection in India: A Critical Inquiry (2018) 7(2) NUS Law Working Paper.

9. Easterbrook, Frank H. & Fischel, Daniel R., The Economic Structure of Corporate Law (Harvard Univ. Press 1991).

10. Shleifer, Andrei & Vishny, Robert W., A Survey of Corporate Governance, 52 J. Fin. 737 (1997).

11. Securities and Exchange Board of India (SEBI), Report of the Committee on Corporate Governance (Kumar Mangalam Birla Committee Report, 1999).

12. Securities and Exchange Board of India (SEBI), Consultation Paper on Review of Corporate Governance Norms (2023).