How shareholders’ activism ensures accountability, protects listed firms

Shareholders are the owners of companies whether listed or not. They have claim on a portion of the assets owned by the company.

As these assets generate profits, which are ploughed back for further growth, shareholder value increases which capital markets reward through rise in stock price.
 
The 21st Century has seen a rapid increase in shareholders’ activism, resulting in general awareness, involvement and influence of corporate shareholders on corporate governance.

Markets in North America and Europe have seen more turnovers with boards of directors, whose members are subject to shareholder votes, solicitation of votes and legal action.
 
Individual shareholders who do not possess large share price influence or less than one per cent of outstanding shares for example, must mobilise others to have real strategic influence.

However, the collective of shareholders can exert significant influence to bring about desired changes in the direction of the firm in both the short and long terms.
 
In 2012, the Harvard Law School Corporate Governance Symposium (HLS), reported that markets continued to see shareholders making their voices heard, and that there was a potentially fundamental shift in the balance of authority between boards of directors and shareholders.
   
These owners of business take on the greatest risk in enterprises; as residual risk bearers, they may receive nothing if the company winds up. If the company grows its profit on consistent basis, a long-term shareholder value is maximised.      
   
This is the fundamental objective of good corporate governance. Hence, as principals, shareholders define the objectives of companies, which management as agents pursue. Though it is presumed that management may discharge these responsibilities, in practice, the objectives of management may differ from those of shareholders. 

Accountability and corporate governance
If shareholders actively exercise their numerous rights, accountability and quality of corporate governance can be remarkably enhanced.

Similarly, a lack of goals congruence could lead to agency cost that may ultimately rob shareholders of the reward for their risk hence, the need for accountability.
   
Furthermore, agency cost can be reduced, and long-term shareholder value enhanced through corporate disclosure of financial and non-financial information, and independent oversight of management by directors and audit committee. 
   
For instance, Nigerian shareholders had in 2011, found themselves on the horns of a dilemma with over N83 billion losses arising from the nationalisation of three banks, namely Bank PHB, Afribank, and Spring Bank by the Central Bank of Nigeria (CBN), in conjunction with Nigeria Deposit Insurance Corporation (NDIC). These banks were renamed as Keystone Bank, Mainstreet Bank, and Enterprise Bank respectively, and were generally referred to as ‘Bridge Banks’.
 
While retail investors were still grappling with the N83 billion loss of investment, they were faced with another predicament from the sale of Skye Bank, following the inability of its owners to shore up the needed capital for the distressed bank in 2018, where an estimated N10.69 billion, being the value of the shareholders’ fund was eroded.

CSCS Chairman, Oscar Onyema

“We force companies to disclose, when they put out their financials, you go to the AGM, and you have rights to ask questions. If the management is doing something, you have to hold them accountable; you cannot wait after things to be blown up before you start looking for the Stock Exchange.”  
 
He continued: “We operate within legal boundaries and if you take banks, the primary regulator for banks is the CBN, and their own limits are different from ours, and we cannot stop the CBN from taking regulatory actions against the bank. We cannot, but we can encourage shareholders to make sure they keep their eyes on the board, and make sure that they ask the pertinent questions, and hold the board and their management accountable. 
 
“We will make sure that disclosures are done and we would not allow companies that are not disclosing to continue to be in the market. We will work with other regulators to make sure that if there is any way we can protect and preserve value for shareholders, that would be done.”    

Also commenting, the Head, Registration Exchanges and Market Infrastructure Department, SEC, Emomotimi Agama, said: “Corporate governance is important for every institution. The monitors of corporate governance incidentally are the shareholders. So if the shareholders do not monitor the corporate governance of the institutions where they are investing or have invested, it is as good as throwing their money into the well.
   
“Of course shareholders should be active in finding out and following up with the managers of the companies they have invested in, if they find anything faulty, it is their responsibility to inform the regulators or the SEC. If the SEC does not know, they cannot take an action but once the SEC is aware; they cannot lose sight of taking an action immediately to save any situation that will be untold or unwanted in future.
   
He continued: “The private placement are limited liability companies that do not fall within the regulation of SEC, and that is why investors must make inquiry because they did not look at the companies they were investing; they were just following the flurry and everybody came to collect money from them. They must take their time to find out the nature of these companies, what it does, what is the future of these companies, and find advisers to do that for them.
   
“Once they do that, no adviser worth its salt will review an account or a company and the company is bad and would tell the investor to invest in it. Shareholders must learn to find out the nature of the company, which often times they do not have the technical knowledge of, and that is why you have an advisory clause in any prospectus.

Keeping board and management on check
Shareholder activism is derived from their level of ownership rights. Every company has a hierarchical structure of rights and privileges that accompany the different classes of the stock.

In addition to the general rights provided for in law, the Articles of Association of the company may further confer special rights on certain classes of shareholders. 

Their nefarious activities need to be curbed before they wreck further havoc on the capital market.  
 
‘Fortunately, there are many advocacy and activist groups formed by shareholders to foster accountability and defend themselves against oppression, and collectively protect their rights.”
 
He insisted that for shareholder activism to be effective and meaningfully enhance accountability and good corporate governance, it is imperative that all shareholders must comply with the code of conduct drawn up by the SEC. 
   
For this shareholder, Nona Awoh, argued that the essential thing is understanding the business, reading the financials, and asking the appropriate questions. 

“This is the only way, because if the man running the business knows that you do not know, how will he give you the answers. A number of us need to be knowledgeable about the business, not all the businesses but know a little about the business.

“ As much as you ask the relevant question, they will even tell you much more that will help know better about the business and that is one of the easiest way to get some of these rubbish off road.  I do not want to compare what people do with what I expect. The reason is that your background, education, and experience have a role on what you do.

“So if they do not know and think that their attitude is the best, no matter what you tell them, they do not see anything wrong in it.  But there is need for continuous education that is basically important because once you are buying shares, you are buying information and if you do not have the information, you are wasting your time.”