GSK Director Appointment: Cumulative Voting Way!

In its forthcoming annual general meeting (AGM) on 9 April 2013, GSK Consumer Healthcare Limited (GSK CH) has proposed to appoint all its directors by adopting a system of proportionate representation, through the cumulative voting route.

What is cumulative voting?

The Securities and Exchange Commission (SEC) has described cumulative voting as a type of voting process that allows a shareholder to accumulate votes for their preferred candidate on the nomination list and strengthens the ability of minority shareholders to elect a director. 

This method allows shareholders to cast all of their votes for a single nominee for the board of directors when the company has multiple openings on its board. In contrast, in "regular" or "statutory" voting, shareholders may not give more than one vote per share to any single nominee. For example, if the election is for seven directors and you hold 300 shares (with one vote per share), under the regular method you could vote a maximum of 300 shares for any one candidate (giving you 2,100 votes total - 300 votes per each of the seven candidates). With cumulative voting, you could choose to vote all 2,100 votes for one candidate, 1,050 each to two candidates, or otherwise divide your votes whichever way you wanted. 

If minority shareholders work together and get cast all of their votes for a single candidate, they can hope to get her elected, even if they only make up a small share of the population. Cumulative voting thus gives a boost to corporate democracy but also reduce the clout of the promoter group in stacking up the board with its chosen nominees. 

Section 265 of the Companies Act, 1956 permits a company to adopt proportionate representation through the principle of cumulative voting, provided it is included in its articles of association (AoA).  GSK CH has this in place since it was incorporated in 1958. Appointments are made once in every three years and are non-rotational (- it is not permissible for a director appointed to be removed from office during his tenure).  As it’s a non-mandatory provision, almost none of the listed Indian companies are yet to move towards a cumulative voting system. The situation is unlikely to change as it remains a non-mandatory provision even in the new Companies Bill, 2012.

Cumulative voting can be a powerful tool for minority shareholders in India. What we need is timely and adequate disclosures about the nominated directors and a greater willingness on the part of institutional investors to work collaboratively on their voting strategy. 

IIAS comment ‘Breaking the boardroom barrier’ is attached.

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