THE MYTH OF DIRECTOR APPOINTMENT BY SHAREHOLDERS AND SHAREHOLDER ACTIVISM IN LISTED COMPANIES

Abstract

This article aims to articulate two main arguments. The first is that even though shareholders are the owners of the capital of their business enterprises and are apparently best suited to oversee the direction of their businesses, they are in fact very docile, particularly in public companies. Due to the advent of “the separation of ownership and control” in these companies, the direction of enterprises is invariably determined by the directors of the company. This, however, does not mean that shareholders are totally divested of control since, in law, they are the ones who appoint directors, thus determining the direction of their companies. The article points out that notwithstanding that in law it is the shareholders who appoint and remove directors, in practice this is hardly the case, more particularly in listed companies. The point is made that with the probable exception of the first members of the board of directors, the subsequent directors elected to the board are usually the appointees of senior management and directors, particularly of the CEO and the chairman.
The second argument made by this article is that even though shareholders do have some scope in terms of the Companies Act and corporate constitutions to engage in corporate governance, they are in fact passive and fail to intervene in corporate decision-making. One aspect which makes the participation in corporate governance difficult for shareholders is the separation of ownership from control and portfolio diversification resorted to mainly by institutional shareholders. The article then asks whether in the advent of the failure of the usual methods of intervening in corporate governance (such as meetings and exercise of rights in the corporate constitution), shareholders may be able to effect their corporate governance role by means of derivative litigation or class action. The article ultimately finds that even with the liberalisation of common law derivative action brought about by section 266 of the
Companies Act, there is a dearth of vigilance by shareholders in ensuring that directors comply with good governance standards.