This arti­cle is a guest con­tri­bu­tion from Mark Mobius, Vice-Chairman, Franklin Tem­ple­ton Investments.

This week, I talk about an issue that I think is impor­tant for investors, espe­cially for long-term investors. It is not enough just to iden­tify the next “big oppor­tu­nity”, but, hav­ing iden­ti­fied it and invested in it, you need per­sis­tence and deter­mi­na­tion to ensure that your invest­ment stays on the right track.

In my view, share­holder activism is not a priv­i­lege – it is a right and a respon­si­bil­ity. When we invest in a com­pany, we own part of that com­pany and we are partly respon­si­ble for how that com­pany pro­gresses. If we believe there is some­thing going wrong with the com­pany, then we, as share­hold­ers, must become active and vocal.

How­ever, most minor­ity share­hold­ers tend not to be very active. One of the biggest rea­sons for their reluc­tance is that it can take a lot of time and effort, and some­times money too, to per­suade man­age­ment to change. To become a strong activist, one may need to hire lawyers, which could become quite expen­sive. Share­hold­ers often find that it is much eas­ier to sim­ply sell their posi­tion in a com­pany that they feel is going in the wrong direc­tion. If enough share­hold­ers sell out, and the share price drops, the company’s man­age­ment may real­ize that their actions are not wel­comed by the mar­ket, and they may retrace these actions. How­ever, even if a share sell-off engen­ders change (which itself is unlikely), the change usu­ally comes too late for those share­hold­ers that have already sold out. In the long term, trad­ing in and out of a company’s shares could present a cost­lier and more time-consuming strat­egy than sim­ply exer­cis­ing your rights as a shareholder.

We pur­sue share­holder activism in vary­ing degrees of inten­sity. Our ini­tial step is usu­ally to com­mu­ni­cate with the company’s man­age­ment and direc­tors to express our con­cerns and begin a dia­logue. Often, that is enough. If that does not work, then more aggres­sive action, such as vot­ing out the direc­tors, may be needed. How­ever, the lat­ter requires many investors to get together and express the same con­cerns. Decid­ing when and if we might con­sider tak­ing a share­holder activist posi­tion must be care­fully weighed against how much we have invested in the com­pany and whether we think tak­ing aggres­sive action has a good chance of suc­cess to war­rant the nec­es­sary time and money involved.

A his­tor­i­cal exam­ple of an occa­sion when our strat­egy of share­holder activism proved suc­cess­ful hap­pened in May 2006 with a large [inter­na­tional] man­u­fac­tur­ing com­pany. The com­pany had his­tor­i­cally been pay­ing a nom­i­nal fixed roy­alty fee to the found­ing fam­ily, for the use of their name. Then, in the first quar­ter of 2006, the company’s board decided to change this roy­alty from a fixed sum to a per­cent­age of net sales, which involved rais­ing the pay­ment quite sub­stan­tially. When this change was dis­closed in the first-quarter earn­ings report, we imme­di­ately sent a let­ter to the com­pany on May 5, 2006, express­ing our strong dis­agree­ment and detail­ing why we thought the deci­sion was an abuse of minor­ity share­hold­ers’ rights.

Next, we led a large group of minor­ity share­hold­ers in com­plain­ing to var­i­ous enti­ties – the com­pany, the indi­vid­ual board mem­bers’ offices and the local reg­u­la­tor. Finally, we made the case pub­lic through the media. We nor­mally do not favor pub­lic announce­ments on such mat­ters, and our deci­sion to go pub­lic was made when we felt that we had exhausted all other options avail­able to us at the time with lit­tle suc­cess. We also felt it was nec­es­sary to com­mu­ni­cate our con­cern and the con­cern of other share­hold­ers as quickly as pos­si­ble on such a mate­r­ial change involv­ing a pub­lic company.

On May 8, 2006, our com­bined efforts bore fruit: the com­pany revoked the deci­sion to pay roy­al­ties to the found­ing fam­ily. As a fur­ther pos­i­tive devel­op­ment, the com­pany announced that own­er­ship of the brand would be trans­ferred to the com­pany at no charge, ensur­ing that no roy­al­ties would be paid at all, in the future as well. Sure enough, after the company’s share price had fallen more than 8% in the pre­ced­ing three days, it recov­ered by more than 2% on the day after the announcement.

The fact that the found­ing fam­ily, the company’s man­age­ment and its direc­tors finally revoked their deci­sion should reflect pos­i­tively on all of them. In their response, they showed that they were sen­si­tive to the con­cerns of minor­ity share­hold­ers, which we view as an impor­tant indi­ca­tion of good cor­po­rate gov­er­nance. Their actions reaf­firmed our faith in the com­pany as well as our pos­i­tive out­look for its future growth.

I hope this exam­ple sparks in you the inter­est and desire to become a more active par­tic­i­pant in the com­pa­nies where you are a share­holder. I would strongly encour­age you to speak up and take action, to the extent that your time and capa­bil­i­ties allow, if you dis­agree with the direc­tion that a company’s man­age­ment is fol­low­ing. We may be minor­ity share­hold­ers, but by speak­ing out for what we think is right, we may be able to bring about change for the greater good of a com­pany and all its shareholders.

Source: Know­ing Your Share­holder Rights, Mark Mobius, April 2, 2010

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