In a move that will give investors a greater say in choosing the company's board, GSK Consumer has adopted proportionate representation using cumulative voting. Sajeet Manghat and Ashmit Kumar of CNBC-TV18 find out what this means for the boardroom.
If one has, let's say, 300 equity shares in a company, then it means 300 votes. Right? No, one could have a lot more, especially when it comes to electing the company's board members
Section 265 of the Companies Act permits any company to adopt proportionate representation using cumulative voting, provided this is included in the Articles of Association of the company.
The adoption of this provision will mean that, for instance, if there are seven board members up for election, a shareholder with 300 shares actually has 2,100 votes -- that's 300 votes per candidate. The shareholder can use these 2,100 votes to vote for or against any one candidate, or split up the 2,100 votes as he/she sees fit to vote for or against the candidates of his choice.
Now since this is a non-mandatory clause, not many companies have opted to enforce it. But GSK Consumer wants to empower its minority shareholders, and that's just what it has done.
If one owes 300 shares in the company and seven directors have to be appointed then what happens in the normal course is that one has a total of 300 votes for each of the sevendirectors. So, in other words one has got a total of 2100 votes, but for a single director one cannot cast more than 300 votes.
In the cumulative voting system one has got a total of 2100 votes not dissimilar to the first instance but the fundamental difference here is that one can cast these 2100 votes in favour of one director.
Corporate houses in many countries like the US, Italy, Russia, and China have already begun allowing for cumulative voting. The argument is that this gives minority shareholders more strength against promoter shareholders, who are generally able to accumulate votes more effectively than minority shareholders, and hence could dominate the voting process.
However, this rule continues to be optional in the new Companies Bill as well, and experts say market regulator Sebi should look at pushing more Indian companies to voluntarily adopt this policy.
Amit Tandon, founder & MD, IIAS says, "The regulators have made that provision and they have said look if companies want to do so they can but more than the regulator its much better and far more effective in my view if investors start pushing companies to adopt this because they are someone who will benefit from the fact that there is people on the board who can look after the interest of a broader community of investors and not just listen to something that the controlling shareholders or promoter shareholder is saying."
Shareholders of GSK Consumer will get to exercise their new, stronger rights when they meet on the April 9 to elect the company's directors. But minority shareholders in other blue-chip companies may have to wait a while before they enjoy the same empowerment.