Shareholder Activism: Business Responsibility and Sustainability Essay

September 21, 2021 by Essay Writer

Since the turn of the century, the business environment in the contemporary world has become more dynamic and competitive. This phenomenon has been necessitated by factors such as globalization, advancements in technology, increased access to education, economic empowerment, as well as the development of viable and effective business models (Gordon & Ringe, 2018).

The investment culture across the world is highly dependent on the ability of financial institutions and investors to collaborate in addressing various issues relating to corporate governance and the principle of the common good. In the recent past, some of the notable global trends relating to sustainable business practices are shareholder activism and responsible investment. This essay will critically analyze the advantages and disadvantages of the two trends in relation to their impact on decision-making for corporate social responsibility.

Shareholder Activism

According to economic experts, shareholder activism refers to a process through which an individual with equity in a publicly traded corporation attempts to use his or her shareholder rights to pressure the management team into making changes (Carlisle, 2014). Shareholders are partial owners of a corporation. Thus they have rights they can exercise to influence a change of behavior. However, achieving this feat is highly dependent on one’s share classification.

Major shareholders have a greater influence over the running of a corporation compared to minority shareholders who only have limited options such as proxy battles, publicity campaigns, litigation, as well as writing formal proposals that are voted for during annual meetings (Carlisle, 2014). An activist shareholder focuses on pressuring the management to make financial and non-financial changes that range from the corporate policy, financing structure, disinvestment, adoption of environmentally conscious policies to cost-cutting measures, among others (Reed & Storrud-Barnes, 2015).

Several publicly listed companies in the United States have been the subject of activism where shareholders mainly ask for disinvestment from politically sensitive countries and revision of sustainability strategies. Reports indicate that the efforts of activist shareholders have been escalating at an alarming rate over the last decade. This observable fact has been influenced by the high dissatisfaction of shareholders with the poor performance of the management team, which is often characterized by elements such as low profitability, reduced support for workers’ rights, and lack of accountability (Walker, 2016).

Advantages of Shareholder Activism

Research has shown that shareholder activism has a number of benefits to a corporation in terms of making the right corporate social responsibility decisions (Gong, 2013). Experts argue that shareholder activism has numerous benefits to an organization as long as it is done at the right time, using the appropriate channels, and with a precise intention. For it to have a positive impact on a corporation, it is important to ensure that its objectives reflect the long-term interests of everyone and not just a group of shareholders.

The main reason for this is that it influences the manner in which decisions are made during annual meetings. Stakeholders whose interests are not considered during a campaign to tend to conduct protest votes that often compromise the ability of a corporation to meet its goals in an objective manner (Goarnova & Verstegan, 2014). Over the years, shareholder activism has helped a number of companies that were on the blink of collapsing to get back on track.

One major advantage of shareholder activism is that it increases the accountability of the management team. According to research, two out of three activist campaigns tend to achieve their objectives (Krause, 2018). This is an indication that shareholder activists play a crucial role in ensuring that organizational leaders are more accountable with regard to the decisions they make on behalf of shareholders.

This improves a corporation’s reputation, thus enhancing the capacity to promote its corporate social responsibility initiatives. In the contemporary world, corporations have an ethical responsibility for environmental stewardship as people struggle to manage the effects of global warming (Krause, 2018). Therefore, it is important for shareholders to ensure that organizational leaders are held accountable whenever they fail to develop and adopt environmentally friendly policies. Research has shown that the success of a corporation’s corporate social responsibility initiatives helps to attract investors and earn more goodwill from the public with regard to the products and services they offer (Reed & Storrud-Barnes, 2015).

The second advantage of shareholder activism is that it plays a pivotal role in promoting sustainable and ethical business practices. For example, in cases where a shareholder activist is seeking a corporation’s management to disinvest from a politically sensitive country, the long-term value is achieved because it helps to solidify the existing assets, prevent the share value from dropping, as well as maintaining good profit margins. Economic experts argue that every corporation should focus on adopting sustainable business practices that complement its objectives for corporate social responsibility initiatives (Behar, 2016).

The management team should ensure that the process of decision-making adapts an inclusive model that allows all the relevant stakeholders to express their opinions and interests. The importance of involving all stakeholders in making crucial decisions is the fact that it manifests their value with regard to achieving the long–term objectives of a corporation (Krause, 2018). In turn, this helps a company to gain a competitive advantage in its respective markets because of crucial elements such as improved employee retention rate, increased output from the workforce, and a strong brand (Butu, 2013).

The demands of shareholder activists help to reorient a corporation’s policy framework towards promoting the values of responsibility and sustainability, which are crucial to the success of corporate social responsibility programs. In addition, it is important to note that such programs are often a direct reflection of the values that a company promotes through its activities (Butu, 2013).

Therefore, it is necessary to ensure that the approach applied in decision-making is well informed and guided by the same values. Reports indicate that a poorly coordinated decision-making process that lacks inclusivity and guiding principles geared towards achieving sustainable business practices often results in a disoriented corporate social responsibility strategy. The financial value of shareholder activism often reflects in the intensity of corporate social responsibility programs a company chooses to support (Goarnova & Verstegan, 2014).

Disadvantages of Shareholder Activism

Shareholder activism is a fully-fledged industry that has been in existence for quite some time. This phenomenon is evidenced by the existence of elements such as activist funds, activist newsletters, activist databases, and activist conferences that give an indication of the pivotal role they play with regard to influencing the running of publicly listed corporations (Butu, 2013). Research has established that shareholder activism can negatively affect decision-making for corporate social responsibility if it is not done with honest intentions (Grewal, Serafeim, & Yoon, 2016).

One of its notable disadvantages is the fact that is it affects the credit rating of an organization in a negative way. Although shareholder activism helps to strengthen corporate governance within an organization, the biggest challenge lies in the constant pressure put on the management teams with regard to their investment decisions. In turn, this affects the amount of money available for other crucial activities such as corporate social responsibility initiatives, paying dividends, and buying back shares, among others (Hartmann, 2014).

This does not create an ideal situation for credit investors because of an increase in the net advantage. In addition, the financial and non-financial changes that shareholder activism influences within an organization often conflict with the needs of corporate debt holders, thus compromising the effectiveness of decision-making.

Another notable disadvantage of shareholder activism is the fact that activists are not always right and often look out for themselves. Thus their investment horizon may be different from that of the corporation (Gantchev, 2013). Studies have shown that one of the main objectives of shareholder activists is convincing shareholders to buy into their agenda through aggressive media campaigns that portray them as having great concern for a corporation’s welfare (Filatochev & Dotesenko, 2015).

However, the truth of the matter is that they primarily focus on pressuring the management to make changes only in areas that meet their interests. Reports indicate that they often bank their campaigns on the perceived notion within the industry that they are always right due to their extensive experience in the investment sector. In most cases, this turns out to the opposite because their timing is often off with regard to the objectives of their activism and the benefits they project a corporation will get by making the proposed changes (Gantchev, 2013).

Investors ought to keep this in mind when making decisions relating to a corporation’s mission and objectives for corporate social responsibility initiatives. The main reason for this is the fact that the ability of any corporation to be responsible and maintain sustainable business practices is highly dependent on the degree of influence that its shareholders have on the decision-making process (Filatochev & Dotesenko, 2015).

Corporate social responsibility programs should be guided by the sober interpretation of the interests that shareholder activists seek to meet through their campaigns. For example, it is important for investors to have a good comprehension of the fickle nature of activists, with regard to their unique investment horizon compared to the ordinary shareholder. Their uniqueness is characterized by their willingness and financial capacity to accept losing a position within a corporation’s board as long as they realize no one is buying into their agenda (Gramm, 2016). This element often affects the ability of an organization to execute its corporate social responsibility agendas because the support of shareholders is often shaky.

Responsible Investment

According to research, many corporations in the contemporary world have purposed to reorient their investment policies in line with the principle of the common good through responsible investment strategies (Richardson, 2013). As a way of addressing the numerous challenges associated with globalization, responsible investment is one of the notable trends that corporations have taken up since the turn of the century. It refers to an investment approach that aims to integrate social, environmental, and governance elements into investment decisions with the sole purpose of improving risk management, as well as generating sustainable and long-term results (Krosinsky, 2017).

The social elements integrated into investment decisions include improving employee relations, diversity, health, safety, working conditions, as well as conflict management. Environmental elements include deforestation, resource depletion, waste management, pollution, and climate change. Governance elements include issues relating to tax strategy, executive pay, political lobbying, corruption, as well as board diversity and structure (Richardson, 2013).

The concept of responsible investment has been necessitated by several factors that relate to sustainability. One of the driving factors is the realization that social, environmental, and governance factors play a pivotal role in determining the risks that an investment attracts, as well as the returns made (Sullivan & Mackenzie, 2017).

According to investment experts, corporations in the contemporary world have also felt the need to invest more responsibly as a way of managing the pressure of competitors who are differentiating themselves with a competitive advantage developed around responsible-oriented venture services. The culture of responsible investing has also been highly influenced by the growing pressure of shareholders who have chosen to take up a more active role in the running of corporations, as well as demanding transparency with regard to the way their money is being put into use (Sherwood & Pollard, 2018).

In the recent past, there have been numerous debates seeking to develop a clear understanding of the exact manner in which an investor should practice responsible investment. According to experts, investors have a wide variety of approaches to choose from if they want to incorporate the concept of responsible investing into the decision-making process (Sherwood & Pollard, 2018). It is important to note that the strategy chosen is often guided by the nature and intensity of corporate social responsibility programs a corporation has chosen to implement.

One of the most effective approaches is using the voting rights of shareholders to influence a corporation’s behavior (Richardson, 2013). Investors can also integrate information about the social, environmental, and governance elements into the quantitative and qualitative analysis of a corporation’s equity value and creditworthiness (Bohm & Skoglund, 2017). This is very important because it plays a crucial role in making informed decisions while making adjustments relating to the selection, weighting, and allocation of assets. In addition, experts argue that such kind of information forms the basis for developing corporate social responsibility initiatives (Richardson, 2013).

Advantages of Responsible Investing

Studies have shown that corporations that integrate the concept of responsible investing in their investment decisions reap several benefits with regard to the effectiveness of their corporate social responsibility programs (Purdom & Krosinsky, 2016). One of the major advantages of responsible investing is the economic efficiency of an organization. According to research, environmentally conscious and socially cohesive business practices by any corporation often pay off good returns in the long run in terms of achieving economic sustainability (Sherwood & Pollard, 2018).

This observable fact is influenced by the increasing demand for products that are compatible with the social norms and environmental regulations across the world. Experts argue that political regulation has played a major role in ensuring organizations conform to the set guidelines through government measures such as emission limit controls that have encouraged more corporations to consider integrating the concept of responsible investment. It is important to note that economic efficiency in a corporation cannot be achieved without taking the personal values of investors into consideration (Richardson, 2013).

For example, the biggest motivation of all investors has a promising future. Thus they are always willing to make the necessary contributions towards achieving an environmentally conscious and socially sustainable investment culture. This forms a good foundation for an informed and inclusive decision-making process because the needs and interests of all stakeholders will be taken into consideration. In turn, this enhances the effectiveness of the corporate social responsibility initiatives because the goodwill from investors is assured since their money will be put into good use (Sherwood & Pollard, 2018).

Another advantage of responsible investment is the fact that it develops investments with competitive returns and limited risks. According to investment experts, the economic relationship between investment and sustainability often leads to positive results within a corporation with regard to the efficiency of the service delivery systems, the effectiveness of the decision-making process, and the satisfaction of investors (Bohm & Skoglund, 2017).

For example, investors have a higher chance of approving corporate social responsibility programs proposed by a corporation’s management team provided that the existing investments have proven to be competitive enough and with minimal or no risks involved. One of the greatest fear among investors is putting their money in high-risk investments or in areas that are politically sensitive (Richardson, 2013).

This often creates fear because there is a high chance that they might make huge losses that will take a long time to recover. Therefore, for a corporation to succeed in its corporate social responsibility initiatives, it is necessary to ensure that the support of all investors is earned before decision-making (Richardson, 2013). In addition, the informed input of investors with regard to the corporate social responsibility agendas is very crucial to the competitiveness of investments because the reception that people give to a corporation’s activities within a community depends on the impact it is having on their quality of life (Hebb, Hawley, Hoepner, & Wood, 2015).

Disadvantages of Responsible Investment

Investment experts argue that responsible investment has a number of reservations despite the immense value it adds to an organization. According to research, the drawbacks associated with the responsible investment are highly inclined towards the ability and willingness of an organization to commit enough resources into the process of integrating the social, environmental, and governance elements in investment decisions (Richardson, 2013).

One of the main disadvantages of responsible investment is that it requires a lot of time and extensive research. Studies have shown that the amount of time required in studying the potential of an investment is often a put-off to investors who have a wide portfolio because of all the necessary benchmarks (Richardson, 2013). Unlike the traditional forms of investments that are passive in nature, ethical investment requires both qualitative and quantitative research with regard to the potential of investments to be competitive enough without attracting unmanageable risks (Bohm & Skoglund, 2017).

In addition, it is important for an investor to ensure that the proposed investment aligns with the organization’s corporate values. This is an important element in making decisions geared towards implementing the corporate social responsibility agendas. According to experts, the social responsibility agendas of an organization are a reflection of its corporate values, thus the reason why responsible investment requires adequate research into the potential of an investment (Bohm & Skoglund, 2017). For example, an organization that promotes the value of sustainable business practices should extend the same commitment to the decisions of its corporate social responsibility programs.

Another drawback associated with responsible investment is the fact that it is not often an optimal strategy considering the high costs involved. Studies have shown that there is no guarantee that ethical investing will give an organization optimal return even when assured financial gains are sacrificed (Bohm & Skoglund, 2017). This phenomenon is necessitated by the high costs incurred in the additional research required before committing to any investment. Experts argue that the need for an organization to put channel resources into an investment that matches its belief system is quite costly because it often eats into the portfolio’s profits (Bohm & Skoglund, 2017).

This challenge has proven to be a big influencing factor with regard to the decisions that some organizations make for their corporate social responsibility programs. For example, instead of embarking on an ethical investment approach that is costly, an organization can opt to apply the conventional strategies and commit a considerable fraction of its profits to increase the number of activities in its corporate social responsibility agendas. Such a decision is often influenced by the reservations of shareholders regarding the level of risks they are willing to take on investments (Richardson, 2013). Experts argue that conventional strategies of investing have lower risks, but their returns are not as augmented as those associated with responsible investing.

Conclusion

Corporations in the contemporary world should integrate the elements of responsibility and sustainability into their business practices. A corporation can benefit or suffer from the activities of shareholder activists based on the impending situation. Shareholder activists have the ability to influence the management team more than the average shareholder does. Organizational leaders should appreciate the fact that the changes shareholder activists attempt to influence often have huge potential in terms of increasing the value of shares. The economic value of an organization can be further heightened through responsible investing, which focuses on integrating social, environmental, and governance elements into investment decisions.

References

Behar, A. (2016). The shareholder action guide: Unleash your hidden powers to hold corporations. New York, NY: Berrett-Koehler Publishers.

Bohm ,S., & Skoglund, A. (2017). Why companies are embracing environmental activism. CNN. Web.

Butu, M. (2013). Shareholder activism by hedge funds: Motivations and markets perceptions of hedge fund interventions. San Francisco, CA: Diplomica Verlag.

Carlisle, T.E. (2014). Deep value: Why activist investors and other contrarians battle for control of losing corporations. New York, NY: John Wiley & Sons.

Filatochev, I., & Dotesenko, O. (2015). Shareholder activism in the UK: Types of activists, forms of activism, and their impact on the target’s performance. Journal of Managerial Governance, 19(1), 5-24.

Gantchev, N. (2013). The cost of shareholder activism: Evidence from a sequential decision model. Journal of Financial Economics, 107(3), 610-631.

Goarnova, M., & Verstegan, R.L. (2014). Shareholder activism: A multidisciplinary review. Journal of Management, 40(5), 1230-1268.

Gong, B. (2013). Understanding institutional shareholder activism: A comparative study of the UK and China. New York, NY: Routledge.

Gordon, J.N., & Ringe, W. (2018). The oxford handbook of corporate law and governance. Oxford, UK: Oxford University Press.

Gramm, J. (2016). Dear chairman: Boardroom battles and the rise of shareholder activism. New York, NY: Harper Collins.

Grewal, J., Serafeim, G., & Yoon, A. (2016). Shareholder activism on sustainability issues. New York, NY: Routledge.

Hartmann, M.D. (2014). Shareholder activism: Benefits and drawbacks. New York, NY: PL Academic Research.

Hebb, T., Hawley, J.P., Hoepner, A.G.F., & Wood, D. (2015). The Routledge handbook of responsible investment. New York, NY: Routledge.

Krause, N. (2018). Shareholder activism: A practitioner’s handbook. Massachusetts, MA: De Gruyter.

Krosinsky, C. (2017). The short guide to sustainable investing (3rd ed.). New York, NY: Taylor & Francis.

Purdom, S., & Krosinsky, C. (2016). Sustainable investing: Revolutions in theory and practice. New York, NY: Taylor & Francis.

Reed, R., & Storrud-Barnes, S.F. (2015). Increased shareholder activism and the changing landscape of corporate governance. American Journal of Business, 30(1), 12-34.

Richardson, B.J. (2013). Fiduciary law and responsible investing: In nature’s trust. New York, NY: Routledge.

Sherwood, M.W., & Pollard, J. (2018). Responsible investing: An introduction to environmental, social, and governance investments. New York, NY: Taylor & Francis.

Sullivan, R., & Mackenzie, C. (2017). Responsible investment. New York, NY: Taylor & Francis.

Walker, O. (2016). Barbarians in the boardroom: Activist investors and the battle for control of the world’s most powerful companies. London, UK: Pearson UK.

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