The proposed Companies Bill, 2011 is likely to provide for appointment of directors elected by small shareholders. Herein, a listed company will be required to have one director elected by small shareholders. Shareholders holding shares of nominal value of not more than Rs 20,000 would fall in the class of small shareholders. No one can quarrel with the idea. But to make it credible, government would have to follow swiftly with rules and regulations setting out the procedure for implementation.

The bill has left all the detailing of this important process to the phrase, ‘as may be prescribed.’ Whether this is carelessness or a deliberate ploy isn’t quite the point. The danger is.

For example, the relevant word used i.e ‘elected’ gives away the fact that small shareholders as a class may get to nominate one director on the board by majority. By majority!

Whether we end up having a ‘cumulative voting’, ‘slate voting’, or election of one director by the class of small shareholders, the initiative begs several questions.

In case of companies with large share capital and widely held, one director generating a majority among a stadium full number of small shareholders appears crazy. One may also ask, why the number is limited to only one director to represent a vast body/number of small shareholders?

I would like to see adequate protection to ensure that errant majority/promoter shareholders aren’t able to defeat the objective by managing the compliance. Conversely, I would like to be reassured that shady elements masked under the garb of small shareholders aren’t able to hold up corporate functioning, hoisting a trouble maker into the board, making it a centre for confrontation, defeating the overarching interests of the company.

One solution can be to engage investor associations to actively participate in the qualitative selection of a director capable of performing her responsibility to act as a watchdog of small shareholder interests. This could give small shareholders more insight into the affairs of the company. Proper candidates from amongst those accredited by the investor associations via slate voting could be the way forward.

Further, the rights and obligations of small shareholders and the nominee director need to be sufficiently spelt out. Merely having a director elected by small shareholders is of little consequence if she does not have her task cut out including specific answerability to the body of small shareholders.

Consequences of non-performance should lead to right to recall by the small shareholders.

Presently the proposed provisions are silent on all these accounts.

One would have hoped that the Ukrainian example of  ‘UKRNEFT’ minority shareholders representing 9% shares of the company together holding out as a pressure group more than a decade ago even in the absence of a similar position on the board under law and resorted to various shades of bargains in the process - has served as a learning for our law makers while proposing the provisions discussed above.

For those coming in late, the right of representation on the board of listed companies to the small shareholders has been provided for in various countries.

The California Corporations Code provides minority shareholders to (ac)cumulate their votes upon a motion initiated by any minority shareholder to appoint their nominee/s on the Board of Directors. Unlike the proposal in the Companies Bill, minority shareholders can appoint more than 1 director on the board.

Brazil’s company law too provides for representation of minority shareholders on the board through a dual process of cumulative voting which can be initiated by any common shareholder holding 10% equity shares of the company and mandating one director nominated by preferred and/or minority shareholders on the board of directors of the company.

The Chinese Corporation Code mandates cumulative voting for appointment of directors and goes a mile ahead to provide that a director cannot be removed if (i) the removal will deny a representation to minority shareholders in the Board and (ii) the removal is voted by two thirds of the paid up share capital.

The Code of Corporate Governance issued by the Securities & Exchange Commission of Pakistan encourages listed companies to enable representation of minority shareholders on their boards and has suggested steps to be taken by the listed companies. In this regard the Code suggests listed companies to take steps for minority shareholders as a class to contest election of directors by proxy solicitation, a process similar to cumulative voting.

The 2005 Corporate Governance reforms in Italy provide for mandatory representation of minority shareholders on the board of directors of Italian listed corporations. A minority shareholder holding not more than 2.5% of the share capital of the company can propose an alternative list of directors for the corporation to choose for representation of minority shareholders on the board. Thereafter, the laws in Italy have encouraged the ‘slate voting’ and emphasized on the need for directors representing  both majority and minority shareholders to work in the interest of the corporation.