Directors’ dilemma: should directors act on shareholder demands?
In this case study, David is a long-standing expert in the airline business. He has been non-executive chairman of a large listed low-cost airline, RA plc, for 16 years.aIn this case study, you are the chairman of a publicly listed company with a long-standing track record of solid performance. Part of your duty is to liaise with shareholders, particularly substantial shareholders. The substantial shareholders in your company are all institutional investors managing pension fund monies.
The investment managers are highly incentivised, their remuneration being heavily dependent on the annual performance of the share price. Managers of the top three institutional investors in your company have approached you expressing their concern at the extremely conservative way in which the company is managed which they believe has depressed the share price of the company. Their view is that the management team is old fashioned, ‘fuddy-duddy’ and have not adopted more modern methods of financing the business, and of accounting for the business activities.
They have also challenged the refusal of the company to abandon a large investment in a developing country (which is not profitable but is breaking even), which they believe is heavily depressing the share price. You respond that de-investing from that country would cause terrible poverty. The investment managers respond that this is not their problem. Their job is to provide the shareholders with the best return on their capital. The investment managers have said that unless more modern practices are adopted, and unless the board agrees to abandon the investment in the third world country, they will sell their shares in the company.
A recent Sunday newspaper has revealed that aown multi-million dollar investment company, which he co-founded some years ago, is a bidder for an airport that is up for sale. RA plc is the airport’s biggest customer and has, until recently, also been interested in buying the airport.
How would you as chairman respond to these institutional investors’ requests?