In a verdict yesterday, the Delhi High Court allowed the Comptroller and Auditor General (CAG) of India to audit the accounts of private telecom companies under the Telecom Regulatory Authority of India (TRAI) Act.
This his kind of ruling was unthinkable even a few years back as CAG was and is still largely seen as an auditor of companies owned by the government.
As natural resources such as spectrum, gas/oil fields, coal, etc cannot be easily priced, the government has a big stake in these sectors and many of these companies that are involved in the production sharing of natural resources or profit sharing from natural resources enter into a public-private partnership (PPP) with the Government of India, so it appears logical that industries and sectors that deal with precious natural resources come under the ambit of CAG.
CAG doing audit of such private companies will have the several ramifications on the overall dynamics of the industry.
Continuing from my last post ‘ Is shareholder engagement good for companies? ’, here we look at the scope of shareholders engagement and different approaches to shareholder engagement.
What is the scope of shareholder engagement?
Shareholders have a legitimate role in areas pertaining to:
- Corporate Strategy – such as mergers, diversification, restructuring, non core asset sale.
- Capital Structure – such as capital allocation discipline, use of cash on balance sheet.
- Governance – such as audit-related issues, board structure, managerial remuneration.
However shareholders are not expected to micromanage companies. Nor is it desirable that shareholders push for short term profitability over sustainability and long term value creation. It is important that shareholders and board members engage effectively in the shared pursuit of high quality governance.
What are the different ways in which shareholders engage with companies?
Shareholders can either have a proactive approach for engagement with a company or may adopt a passive approach towards a company.
Passive investors sell off their shares if they are dissatisfied with the corporate decisions.
On the other hand, active investors engage proactively with the management, prior to a corporate decision being affected, in order to change the outcome of the decision. While the term ‘shareholder engagement’ is used to describe a collaborative approach, ‘shareholder activism’ refers to the use of a more assertive approach by the minority shareholders to affect changes in management and strategy of a firm. Read more
Shareholder activism has increased significantly in the last few years, particularly after the financial crisis of 2008. However, it has since then been a debatable topic, as it is difficult to quantify “appropriate” level of shareholder engagement, which is desirable for achieving effective governance, while adding to business value. Quite often there is an apprehension that excessive shareholder intervention may consume a lot of valuable management time and result in short term profit orientation.
Why should shareholders engage with company management and boards?
A business needs capital to finance its growth Shareholders are the providers of capital to a business and as such are part owners of the business. Shareholders invest in the business hoping for a higher potential return from the investment while accepting a greater potential risk than other providers of capital. As shareholders own a share of the organization in which they have invested, this entitles them to ownership rights (i.e. rights to profits and assets in proportion to their shareholding) and in most cases control rights (i.e. rights to have a say in the running of that company, e.g. they may vote on key issues).
Management makes use of the capital to run the business and has an obligation to do so in a fair and transparent manner while maximizing value for the shareholders. Read more