Corporate governance — the need for widening the scope of shareholder democracy and rights, investor protection and information disclosure — has been rightly emphasised in the context of the proposed new Companies Bill (The Hindu, November 8, 2009). However, the actual role of shareholders needs to be expanded. Shareholder democracy must include the working and responsibilities of investment companies, including banks, mutual fund companies, brokerages and insurance/annuity companies.
Rights disclosure norms should not be limited to select areas — like information on payout to directors — and should include labour and labour unions, diversity and discrimination in employment, land acquisition, eviction and impact on local communities and environment. Shareholders’ rights and democracy are not about demonising companies. There is no such thing as a perfect company. Likewise, there is no such thing as a company that is doing everything wrong. Shareholders’ rights should be about empowering them to encourage companies to improve.
Internationally, there are a number of positive examples of use and expansion of shareholder rights. Since the 1970s, shareholders have used their power as stock owners to press companies for changes on a wide range of social, environmental and human rights issues. These concerns have included doing business under repressive regimes (such as apartheid South Africa or military-ruled Myanmar), corporate use of security forces (as has occurred in Nigeria and Indonesia), and poor working conditions in companies.
Shareholders, including investment firms and mutual funds, trade unions, universities and foundations, have played a pro-active role in proposing and supporting human rights resolutions. Why can’t this be institutionalised and practised in India?
At the heart of shareholder democracy is the right of shareholders to not only file resolutions but also seek information and ensure changes. Of course, it can contain several statements of fact as well as a ‘resolved’ clause, which specifies the change in corporate policy or disclosure sought by the resolution-filers. It is moved at an annual shareholders meeting and voted on by the shareholders.
However, shareholder resolutions rarely win a majority of shares voted amid the vast powers of promoters. It has, therefore, been suggested to go for a necessary threshold level of support to submit, consider and adopt the resolution. Further, there should be enough democratic space to resubmit the resolution the following year.
Shareholder resolutions
Resolutions do not have to win a majority in order to help change corporate behaviour. There should be established mechanisms where a shareholder as a resolution-filer gains the attention of the top management and the board. And companies can adopt, in part or whole, the recommendations of individual or minority shareholders. There is a clear lesson in the working of the Right to Information Act — that several complicated legal and procedural requirements to file a resolution successfully at a company meeting should immediately be done away with.
Making a connection with the investment company is vital for the working of shareholder democracy. Yet the vast majority of investment companies do not use their substantial powers as shareholders in this way. Worse, they (unwittingly or otherwise) use their powers in ways that tacitly support the status quo, allowing companies to deny their social, environmental and human rights responsibilities.
There are many ways in which our investment companies can use their shareholder powers positively. They can publicise how their funds and portfolios are invested, and how they vote on different shareholder proposals. They can vote favourably on, and publicly support, existing shareholder proposals that are socially and environmentally conscious. They themselves can file or co-file such proposals with companies they own. They must make public their proxy voting guidelines. Most investors have established a set of guidelines to direct voting on shareholder proposals. Sometimes these guidelines explicitly call for voting against any proposal with a social or environmental agenda!
There is a strong case for public investment companies to establish socially responsible investment guidelines as a proactive strategy, not a reactive divestment-oriented initiative. Establishing socially responsible investment guidelines is one way for shareholders to pressure companies, since it encourages companies to take positive steps that will allow them to be considered appropriate investments. It is important to put a regulation in place that requires mutual funds to disclose publicly how they vote on proposals so that they have an obligation to tell us their stand.
Portfolio managers/firms are serious missing links in corporate governance and shareholder democracy. They often have relationships with companies in which their products are invested. Frequently, the research they use to make their investment decisions comes directly from the companies themselves. Of course, the relationship between the portfolio manager and the company can go both ways — when a portfolio manager has a concern over the short or long-term value of a company based on how it is operating, he can raise the issue, as part of his due diligence on the investment. For the most part, portfolio managers will not take an independent stance when they are assessing investments, unless there is a clear link demonstrating that the concerns could result in an increased financial burden, or liability, for that company. Unfortunately, this type of information is not mainstream since it is not readily available in the balance sheet or an annual report. There is need to have a system of accountability.
The Bhopal example
We will soon have the 25th anniversary of the Bhopal gas tragedy and it is worth recounting how shareholders’ democracy and rights were on display in the case of Bhopal and Dow Chemicals. At Dow Chemicals’ Annual Shareholder Meeting on May 11, 2006, the New York City Fire Department (NYCFD) Pension Fund, the New York State Common Retirement Fund (NYSCRF), and Amnesty International, USA, along with the Boston Common Asset Management and the Sisters of Mercy Regional Community of Detroit Charitable Trust, holding over 4.5 million shares worth over $190 million, presented a resolution: ‘Shareholders request [the] Dow Chemical management to report to shareholders by October 2006, at reasonable cost and excluding confidential information, descriptions of any new initiatives instituted by [the] management to address specific health, environmental and social concerns of Bhopal, India, survivors.”
The supporting statement said Dow Chemicals had acquired Union Carbide, thus becoming a focus of both the Indian government’s efforts to remedy environmental contamination and the survivors’ ongoing need for health care and economic relief. Although a civil case over the disaster was settled by Union Carbide and the Indian government for $470 million, it was done without the consent of most survivors. Numerous unresolved legal issues remain. Suits are pending in Indian courts and the New York district court. It concluded: “Dow, in its Global Public Report, noted that sales and operations in Asia account for $3.3 billion in revenues. Proponents believe the Bhopal disaster may continue to damage Dow’s reputation, which, in our opinion, may reasonably be expected to affect growth prospects in Asia and beyond.” They got 6.3 per cent support on the resolution.
Shareholders again placed a resolution and statement at the 2007 Annual Shareholders Meeting of Dow Chemicals, saying Dow’s long history of failing to disclose the full extent of its liabilities and risks associated with Bhopal, including reputation risks, an ongoing criminal case in India, as well as a civil suit for damages associated with continuing environmental contamination, is deeply discouraging. These circumstances appear to threaten the company’s ability to expand in Asia. Thus the Dow management is requested to inform the shareholders of any new initiative instituted by it to address specific health, environmental and social concerns of the Bhopal survivors. This time, the support for the resolution was 8.25 per cent. The increase in support over the previous year sounds small but it represented almost 20 million shares.
We have vital connections to companies and corporations: a direct public connection and a shareholder connection. Shareholder democracy works on the understanding that when one owns stocks in a company, he or she is truly a company owner and the management should be working on his or her behalf. Shareholders have certain rights and privileges that should be expanded. Further, these rights are beyond just dividends and profits.
