Board voting for corporate leadership positions

Stifled Votes, Undermined Democracy: A critique of Pakistan's recent corporate governance reform

In the scorching summer of '23, an amendment to the Securities and Exchange Commission of Pakistan (SECP)'s Code of Corporate Governance shook the foundation of shareholder representation. The new regulation (7A), introduced through S.R.O. 906(I)/2023, aimed to streamline compliance with board diversity requirements. However, it's left a sour taste, as this reform has trampled over the time-honored cumulative voting method, shrinking the influence of minority shareholders and bolstering the power of majorities.

A minor investor with a 12.51% stake in a listed company attempted to seize a board seat during the 2024 elections. With seven slots up for grabs and the free float capped at 25%,winning a single seat looked achievable under the existing cumulative voting system. Yet, the new voting process-aligned with Regulation 7A- split elections into three separate categories: female, independent, and other directors. The catch? A candidate needed over 20.1% of the votes to secure a "Other Directors" seat, an insurmountable figure for our underdog.

In a realm where the controlling shareholders held over 75% of voting power, the deck was stacked against this unassuming investor. Defeated, they decided to withdraw their candidacy, leaving the incumbents unopposed, turning the election into a hollow formality.

Majority Rules, Minority Drools

The 2023 reform has sown the seeds of several issues:

Shareholders find their voting power disintegrated, as the new framework denies them the flexibility to strategically allocate their voting strength.
The deconstruction of cumulative voting undermines the intent of the Companies Act, 2017, which values minority bloc power.
Contested elections are a rarity now, allowing controlling shareholders to fill reserved seats, such as those for female or independent directors, without a fight, making a mockery of the letter of the law.
Independence, an essential aspect of board composition, is compromised as directors backed by the majority are unlikely to bring forth meaningful dissent or oversight, contradicting their purpose.

The World Watches with Concern

In the arena of corporate governance, mechanisms like cumulative voting and minority representation are cherished tools for fostering fairness among all stakeholders. Countries across the globe have adopted these practices:

The Organization for Economic Co-operation and Development (OECD) recognizes cumulative voting as a legitimate method to secure minority shareholders a voice in the boardroom.
Italy and the UK employ dual-voting or slate-voting structures, guaranteeing a seat for non-controlling shareholders.
Saudi Arabia and China mandate cumulative voting in listed companies to thwart the entrenchment of control.

Pakistan, unfortunately, has veered away from this global norm, transforming a proportional representation framework into a regimented, majority-dominated system-enabling the ruling elite to maintain their grip on power.

Time for Change: A call to rebalance power

To preserve the essence of fair governance, restore shareholder confidence, and reempower the minority:

Reinstitute cumulative voting across a unified slate, returning the power of strategic voting to investors.
Mandate a reserved minority seat on the board to ensure genuine minority representation.
Enforce vote disclosure, necessitating companies to unveil the typical vote thresholds for winning a seat.
Implement a mandatory review of election outcomes by the SECP, assessing whether the reforms have fulfilled their stated objectives.

It is high time Pakistan returned to the principles that uphold global governance: transparency, inclusivity, and balance. Our regulations must adapt to the needs of minority shareholders, embracing the collective wisdom essential for good governance.

Enrichment Data:Overview:

Global Best Practices for Corporate Governance

- Cumulative Voting: A mechanism that allows a shareholder to pool their votes and direct them tactically, often used to boost the power of minority investors[1].- Minority Representation:* A critical aspect of robust corporate governance, ensuring lesser stakeholders have adequate presence on the board. This boosts diversity, preventing majority abuse[2].

Global Trends in Governance

ESG and Sustainability: Increasingly, companies integrate Environmental, Social, and Governance (ESG) considerations into their strategies and reporting processes, reflecting a focus on long-term sustainability and social responsibility[3][5].
Cybersecurity and AI Adoption: We are witnessing the growing integration of AI and cybersecurity measures within corporate operations to address emerging technological risks and potential opportunities[3].
Geopolitical and Economic Changes: Boards need to be adaptive to the shifting geopolitical landscape and economic uncertainties, ensuring resilience and foresight[3].

Pakistan's 2023 Amendment to the Code of Corporate Governance: A Possible Outlook

The 2023 amendment to Pakistan's Code of Corporate Governance likely represents an attempt to align with international best practices by introducing enhanced transparency, accountability, and protection for stakeholders. Although the specifics of the amendment remain undisclosed, it will likely cover measures such as:

Enhancement of Minority Protection: With the inclusion of mechanisms like cumulative voting, minority shareholders will find their voices amplified in corporate decision-making.
Improvement of Governance Structure: Strengthening board composition and independence, enabling diverse representation and robust oversight.
Integration of ESG Considerations: Mainstreaming environmental and social concerns into corporate strategies and reporting frameworks.

Comparison

Compared to international best practices, Pakistan's amendment would likely align with global trends that emphasize minority protection, ESG integration, and strategic risk management. However, the success of the amendment depends on whether it encompasses elements such as cumulative voting, enhanced board diversity, and ESG reporting requirements.

Future Directions

Future corporate governance lays the groundwork for:

Reinforcing Regulatory Frameworks: Updating corporate governance codes to address shifts in the regulatory landscape and societal expectations.
Enhancing Transparency and Accountability: Implementing measures to ensure openness in operations and accountability in decision-making processes.
Mainstreaming ESG Factors: To tackle environmental and social challenges, incorporating ESG elements into corporate strategies is essential.

These efforts aim to create a resilient and sustainable governance environment, reflecting global best practices and addressing local challenges.

References:[1] "Cumulative Voting," Investopedia, 2022, https://www.investopedia.com/terms/c/cumulativevoting.asp.[2] Jensen, M. K., & Meckling, W. H. (1976). Theory of the Firm: Managerial Behavior, Agency Costs, and Ownership Structure. Journal of Financial Economics, 3(4): 305-360.[3] "ESG Trends and Insights," Deloitte, 2020, https://www2.deloitte.com/content/dam/Deloitte/us/Documents/about-deloitte/us-cs-impact-ESG-trends-third-edition.pdf.[4] "Cybersecurity and AI Maturity Study," McKinsey & Company, 2019, https://www.mckinsey.com/business-functions/mckinsey-analytics/our-insights/cybersecurity-and-ai-maturity-study.[5] "The Future of Corporate Governance—An ESG Perspective," KPMG, 2019, https://assets.kpmg/content/dam/kpmg/pdf/2019/06/the-future-of-corporate-governance---an-ESG-perspective.pdf.

The finance sector and businesses operating in Pakistan are at increased risk, as the recent amendment to the Code of Corporate Governance that undermines the cumulative voting method could lead to a concentration of power in the hands of majorities, potentially causing a drain on minority shareholder interests.
Given the global best practices in corporate governance, which value minority representation and employ mechanisms like cumulative voting to ensure a voice for all, it is crucial for Pakistan to reconsider its 2023 amendment to its Code of Corporate Governance, addressing the concerns around diminished minority influence and adopting practices that foster balanced, inclusive, and fair business environments.

Board voting for corporate leadership positions