Corporate Governance and Shareholder Activism

🔹 What is Corporate Governance?

Corporate governance refers to the system of rules, practices, and processes by which a company is directed and controlled. It balances the interests of various stakeholders such as shareholders, management, customers, suppliers, financiers, government, and the community.

Good corporate governance ensures:

• Accountability

• Transparency

• Fairness

• Ethical behavior

🔸 Key Components of Corporate Governance

1. Board of Directors

   • The governing body responsible for overseeing management.

   • Includes executive and non-executive (independent) directors.

2. Management

   • CEO and executives who handle day-to-day operations.

3. Shareholders

   • Owners of the company who elect the board and vote on major issues.

4. Committees

   • Audit Committee, Compensation Committee, Risk Committee, etc.

🔹 Why is Corporate Governance Important?

• Protects investors and enhances trust

• Reduces risk of corporate scandals (e.g., Enron, Wirecard)

• Improves access to capital markets

• Enhances long-term sustainability and performance

Shareholder Activism

🔸 What is Shareholder Activism?

Shareholder activism occurs when shareholders use their rights and influence as owners to bring change in a company, usually by:

• Engaging with the board

• Proposing resolutions

• Voting on important decisions

• Launching public campaigns

🔹 Types of Shareholder Activists

1. Institutional investors (e.g., pension funds, mutual funds)

2. Hedge funds (e.g., Elliott Management, Pershing Square)

3. Individual activists

🔸 Common Goals of Shareholder Activism

• Improve corporate governance

• Change management or board members

• Push for mergers, acquisitions, or divestitures

• Advocate for environmental, social, and governance (ESG) changes

• Demand better capital allocation (e.g., dividends, buybacks)

🔹 Notable Cases of Shareholder Activism

• Carl Icahn vs. Apple (2013): Pressured Apple to return cash to shareholders.

• Engine No. 1 vs. ExxonMobil (2021): Won board seats to push for a climate strategy.

🔸 Risks and Criticisms

• Short-term focus: Some activists seek quick profits at the expense of long-term value.

• Conflict with management: May lead to instability.

• Resource intensive: Legal and advisory costs.

✅ Best Practices for Strong Corporate Governance

• Independent and diverse board

• Transparent reporting and disclosures

• Alignment of executive compensation with performance

• Open shareholder communication

• Ethical corporate culture