Look for minority shareholder stories

Sometimes improper treatment of minority investors prompts regulatory action. That’s what happened in a case involving Mexico’s TV Azteca. Shareholders revolted when the company’s chairman and CEO, Ricardo Salinas Pliego, came up with a scheme to finance a new telecom venture by having the publicly traded TV Azteca invest in his new enterprise, without notifying shareholders.

Minority shareholders filed a lawsuit. Several years later, the U.S. Securities and Exchange Commission (SEC) and Mexican authorities launched an investigation into the deal and the profits reaped by both Pliego and a col¬league at the expense of the minority shareholders.

The SEC eventually charged Pliego with fraud. He settled the charges and paid a fine without admitting wrongdoing, but later he decided to delist his companies. Mexican regulators amended laws to force companies to provide more disclosure to minority investors.

In India, the government has been taking steps to prevent corporations from stepping on small shareholders. Under the proposed new Companies Bill, expected to be enacted in 2012, companies must offer an exit plan to shareholders who disagree with major company decisions, such as diversification or a major acquisition. The proposal, not yet translated into law, would do more than simply have dissenting shareholders sell their shares. Instead, a company would have to offer options to share¬holders, possibly including buying back their shares.

Institutional investors often provide tip-offs to journalists about perceived problems at the companies where they have large stakes. Calpers is particularly active. The pension fund questioned the competence of BP plc’s board in 2010 because of its handling of the Gulf of Mexico oil spill. Calpers, which held 60.6 million shares of BP, reportedly felt that the board had fallen down in overseeing the company’s U.S. operations even before the spill.

In April 2011, Calpers was among BP shareholders voting against the company’s reports and accounts at its annual meeting, and also voted against reelecting the director who had been the chairman of the BP board’s safety committee.

The company’s mishandling of the situation led in early March 2012 to a $7.8 billion settlement with more than 100,000 victims of the oil spill.

In emerging markets, where institutional shareholding is typically small, shareholders should be able to rely on journalists to dig into such stories and report on dissent within the company or among shareholders. Shareholder associations, becoming more common and more active in Asia and Africa, are a good source.

For example, Minority Shareholders’ Watchdog Group (MSWG) in Malaysia has a website (http://www.mswg.org.my/web/) and now publishes a weekly electronic newsletter highlighting corporate governance issues and ongoing company transactions. The Securities Investors Association in Singapore (SIAS) (http://www.sias.org.sg/) performs a similar function and has had several successes in repre-senting shareholder concerns to companies.

Shareholders of the privatized Karachi Electric Supply Company in Pakistan objected to the company’s claims its 2011 annual report that it had reduced post-tax losses from 2010 to 2011. The shareholders’ association charges the lower losses were achieved by “excessive load shedding” — a term used to describe cuts in electricity when demand is high — and “exaggerated billing.” Shareholders also criticized the company for decreasing generation of electricity and taking a larger government subsidy than when it was government-owned.

Read the story at: http://bit.ly/Hxaexa

How We Got the Story

Sometimes a tip can lead to a story about minority share-holders and their struggles. A good source network and knowledge of corporate governance principles are essential to landing the story. That’s what happened when officials at The Children’s Investment Fund (TCI) alerted journalists about its plan to sue individual directors on the board of the recently privatized Coal India Limited. TCI is a minority investor in the company, which is 90 percent owned by the government.

In this edited account, journalist N Sundaresha Subramanian recounts how his newspaper, the Indian daily Business Standard, got the story:

As soon as TCI tipped us, I sensed the potential of the story — a classic David-Goliath tussle where an investor holding a meager 1 percent of the company takes on the big boy that controls 90 percent. I phoned Oscar Veldhuijzen, a partner in TCI.

Veldhuijzen said he had been writing to the management of Coal India ever since the fund invested in the company in the 2010 initial public offering. TCI decided to take action after the government issued a ministerial directive reversing a hike in coal prices, a move that would seriously affect the company’s profitability.

Veldhuijzen obtained a copy of the coal price directive by using the Right to Information (RTI) Act, an Indian law that allows citizens to access information from the government. He provided us with a copy of the document, which showed that a senior government official had sent the directive to Coal India’s chairman.

Because the document came from an interested party, I verified its authenticity by checking the official websites to ensure that the officials named actually occupied the posts.

We also needed the other side of the story, because the board of Coal India was being accused of failing to protect the interests of minority investors and failing in their fiduciary duties. My colleague in Delhi, who is in touch with ministry and company officials, contacted the company. Coal India refused to acknowledge the receipt of the letter from TCI. We were confident about the contents of the letter and had a first-person confirmation from the fund’s officials, so we went ahead with the story.

All of this was accomplished in a couple of hours. We broke the story on our website that night, and it was published in the next day’s edition.

Read the story: http://bit.ly/I9kRay