When it comes to long-term viability and performance, corporate governance is one of the most decisive issues companies face. Corporate fraud, accounting scandals, insider trading, excessive compensation and other perceived organizational failures are typically attributed to poor governance and a lack of devices that would align the interests of managers, shareholders, and other organizational stakeholders.
Good governance and a well functioning system of check and balances necessitate a smooth interplay between employees, managers, boards and shareholders, including other important stakeholders such as regulators, analysts and the society at large. Failure to install a good and functioning system of checks and balances nowadays rapidly triggers the reaction of capital market participants who fearful of loosing their wealth “capture” their property rights to instigate change in the firms they own.
As a response to a flawed system of checks and balances the upsurge of what has been labeled a shareholder rights movement has thus prompted many previously “nameless and faceless” shareholders to participate more actively in the firms they own. Triggered by the invigorated legitimacy of shareholder activism, investors seem to be gaining more confidence, they are beginning to redefine their roles in firms and many of them seem to be enacting an owner as opposed to a shareholder identity. At times, this identity is oppositional and investors view themselves as members of groups antagonistic to organizations; they engage in fierce fights with management and openly attack and boycott “their” organizations. Or, alternatively, they immerse themselves in decisions which traditionally have been the prerogative of managers and demand companies to change their governance structure, redefine their incentive systems and alter strategies towards more environmental and social sustainability. This is important because whether and how shareholders use their ownership position bears important implication for firm value.
In addition, capital markets have seen the development of new phenomena the consequences of which are not easy to predict. For example, there is a mushrooming industry of proxy advisory services and proxy solicitation agencies mandated and ready to turn the scales at the benefit of any shareholding party in the organization ready to pay. Oftentimes this party is a large institutional investor demanding a seat on the board or preparing an unfriendly takeover. Other times this party is an interest group such as a union willing to mobilize and unite employee owners around some important issues. Under these circumstances interest alignment becomes more difficult and more dynamic and companies must brace themselves for more conflicts with and activism by dissatisfied shareowners.
Vigilant leaders are prepared; they are restructuring their boards; they are re-defining their incentive systems; they are beefing up their interface with the investment community; and they are spending more resources into social responsibility, stakeholder relations, and capital market intelligence.