Shareholders’ activism: Why the Siddhartha Lal episode is a wake up call for all companies

Nothing would have seemed remarkably unusual for Siddhartha Lal as he began work on Tuesday. It was a routine Annual General Meeting (AGM) with Eicher Motors' shareholders. Road warrior Lal, who is the company's Managing Director and one credited with the turnaround of an iconic brand, saw his reappointment to the corner office getting the thumbs down from his shareholders. The rub was a proposal to increase his salary at a time when the pandemic has spared almost no one.

Recent instances point towards a scenario where shareholders are not just asking the tough questions but getting tough on controversial decisions. The same week had the pharmaceutical major Lupin, according to media reports, run into an issue with its institutional shareholders. The company's ESOP 2021 scheme was rejected. This was preceded by Vedanta's shareholders voting against the reappointment of former SEBI boss UK Sinha to the board for three years. It was promoter support that saved the day but not before some anxious moments transpired.

As shareholder activism gets louder, companies see themselves being confronted by a new scenario, where greater accountability is not asked for; in fact it is expected. Not adhering to this leads to many embarrassing situations played out in full public view. As M Damodaran, Chairperson, Excellence Enablers and former Chairman, SEBI puts it, "Recent voting patterns at AGMs make one thing very clear. Shareholders need additional information and justification before they support resolutions that are being put to vote."

It is a point Eicher and many other companies would have done well to hear. A senior executive in the mutual fund industry says it is about time companies spent more time, especially on critical decisions, with both institutional and shareholders. "In times like these, the 'don't take me for granted' approach will backfire as we are seeing. Companies where the promoter holding is large will push many decisions through but the dissenting voices will now start to be heard," he explains.

Take the case of Eicher, where the shareholders were not against Lal's continuation as director. The hitch was increased compensation (it was Rs 19.21 crore per annum and the proposal was to increase that to Rs 21.13 crore at a time when the median salary moved up by just 1 per cent) and that threw up an interesting situation.

"Shareholders, who had no problem with his continuing as MD, but had reservations on the proposed increase in compensation, found themselves in difficulty, because there was no way by which they could support one element of the composite resolution, and oppose the other element. As a result, many of them voted against the resolution, in the process, throwing out the baby with the bathwater," points out Damodaran. The way forward may well be to rework the compensation figure and get that cleared by the shareholders. Much as it might eventually go through easily, the drama of the AGM could have been avoided. "This is a good wake up call for companies to ensure they have an increasingly inclusive relationship with all categories of shareholders," sums up Damodaran.

Correction: The story has been updated to replace a word in the first paragraph. The word 'dapper' was replaced with 'road warrior'.

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