Knowing Your Shareholder Rights
This week, I talk about an issue that I think is important for investors, especially for long-term investors. It is not enough just to identify the next “big opportunity”, but, having identified it and invested in it, you need persistence and determination to ensure that your investment stays on the right track.
In my view, shareholder activism is not a privilege – it is a right and a responsibility. When we invest in a company, we own part of that company and we are partly responsible for how that company progresses. If we believe there is something going wrong with the company, then we, as shareholders, must become active and vocal.
However, most minority shareholders tend not to be very active. One of the biggest reasons for their reluctance is that it can take a lot of time and effort, and sometimes money too, to persuade management to change. To become a strong activist, one may need to hire lawyers, which could become quite expensive. Shareholders often find that it is much easier to simply sell their position in a company that they feel is going in the wrong direction. If enough shareholders sell out, and the share price drops, the company’s management may realize that their actions are not welcomed by the market, and they may retrace these actions. However, even if a share sell-off engenders change (which itself is unlikely), the change usually comes too late for those shareholders that have already sold out. In the long term, trading in and out of a company’s shares could present a costlier and more time-consuming strategy than simply exercising your rights as a shareholder.
We pursue shareholder activism in varying degrees of intensity. Our initial step is usually to communicate with the company’s management and directors to express our concerns and begin a dialogue. Often, that is enough. If that does not work, then more aggressive action, such as voting out the directors, may be needed. However, the latter requires many investors to get together and express the same concerns. Deciding when and if we might consider taking a shareholder activist position must be carefully weighed against how much we have invested in the company and whether we think taking aggressive action has a good chance of success to warrant the necessary time and money involved.
A historical example of an occasion when our strategy of shareholder activism proved successful happened in May 2006 with a large [international] manufacturing company. The company had historically been paying a nominal fixed royalty fee to the founding family, for the use of their name. Then, in the first quarter of 2006, the company’s board decided to change this royalty from a fixed sum to a percentage of net sales, which involved raising the payment quite substantially. When this change was disclosed in the first-quarter earnings report, we immediately sent a letter to the company on May 5, 2006, expressing our strong disagreement and detailing why we thought the decision was an abuse of minority shareholders’ rights.
Next, we led a large group of minority shareholders in complaining to various entities – the company, the individual board members’ offices and the local regulator. Finally, we made the case public through the media. We normally do not favor public announcements on such matters, and our decision to go public was made when we felt that we had exhausted all other options available to us at the time with little success. We also felt it was necessary to communicate our concern and the concern of other shareholders as quickly as possible on such a material change involving a public company.
On May 8, 2006, our combined efforts bore fruit: the company revoked the decision to pay royalties to the founding family. As a further positive development, the company announced that ownership of the brand would be transferred to the company at no charge, ensuring that no royalties would be paid at all, in the future as well. Sure enough, after the company’s share price had fallen more than 8% in the preceding three days, it recovered by more than 2% on the day after the announcement.
The fact that the founding family, the company’s management and its directors finally revoked their decision should reflect positively on all of them. In their response, they showed that they were sensitive to the concerns of minority shareholders, which we view as an important indication of good corporate governance. Their actions reaffirmed our faith in the company as well as our positive outlook for its future growth.
I hope this example sparks in you the interest and desire to become a more active participant in the companies where you are a shareholder. I would strongly encourage you to speak up and take action, to the extent that your time and capabilities allow, if you disagree with the direction that a company’s management is following. We may be minority shareholders, but by speaking out for what we think is right, we may be able to bring about change for the greater good of a company and all its shareholders.