Procedure of election of companies’ directors

During the seventies, it was considered expedient by the relevant Government that the method of keeping close control and running business of companies through their Managing Agents be abolished and a democratic system for electing directors by the members on the Board of companies through cumulative voting be introduced. In that context, “The Companies (Managing Agency and Election of Directors) Order, 1972” was issued. As a result, all existing Agreements or Contracts entered into by the companies with their Managing Agents were terminated forthwith. The Managing Agents and the directors nominated by them ceased to hold their respective offices. The main logic behind these reforms as stated was protection of the interests of minority shareholders of the Companies. The newly-introduced method of electing directors by the members in the general meetings provided a very simple and transparent manner of election of directors and consequential appointment of Chief Executive Officer for a term of three years. These reforms were appreciated by the investors and also accepted willingly by the business community. This system worked so smoothly that while reviewing the age-old Companies Act, 1913 (the Act) in the eighties, the time-tested procedure of appointment of directors, their removal, if warranted and the arrangement of filling the casual vacancies occurring due to any reason were provided and incorporated in the revised Company Law i.e. “The Companies Ordinance, 1984”. The said Law remained in the field till 2017 when after a prolonged deliberation, it was also repealed and substituted by the new ‘Companies Act’ enforced on 30th May 2017.
Keeping in view the new developments during the period, the ground realities and practical difficulties faced by the corporate sector, appropriate provisions were inserted and enforced through the revised Company Law but the existing procedure of appointment/election of directors, including the Chief Executives and Chairperson was not disturbed and all the time- tested related provisions were adopted/incorporated in the revised Company Law. However, in order to keep the level of our Corporate Governance in line with the international standards, the Listed Companies (Code of Corporate Governance) Regulations, 2019 (the Regulations) were reviewed and few innovative changes related to the role of independent directors, providing also space for the females’ compulsory representation on the Board of “Public Interest Companies (PICs)” were inserted in the Act and Regulations notified thereunder. However, the provisions related to appointment of independent directors, sub-section (3) of section 166 of the Act specifically stated that “independent directors of a company shall be elected in the same manner as other directors are elected in terms of the provisions of section 159 of the Act”.
Though section 154 of the Act specified the minimum number of directors which must have a company, including compulsory representation of females on the Boards of PICs, yet a uniform procedure of their appointment through a system of cumulative voting has been provided under sections 159 and 166(3) of the Companies Act, 2017. Recently, the SECP (Securities and Exchange Commission of Pakistan), ignoring the spirit of statutory provisions, has introduced a separate voting system for the election of three categories of directors of a company like females, independent and other directors. According to the newly inserted Regulation 7A in the Listed Companies (Code of Corporate Governance) Regulations, 2019, it shall now be mandatory that in future voting for election of directors of listed companies shall be held separately for the three categories, i.e., female directors; independent directors; and other directors.
In this writer’s view the method of separate voting for the three categories will be defeating the spirit of time-tested ‘cumulative voting system’ as the majority shareholders shall always be successful to elect the persons of their choice on the basis of their majority voting powers and they will be depriving the minority shareholders while electing a female and independent directors as separate classes.
So far the election of third category of “other directors” is concerned, they will also be got elected by the majority shareholders having all the seats in their pocket. It may be kept in mind that when there is a competition amongst the less number of seats, a higher percentage of votes is needed to win, which can easily be managed by the majority group.
Thus, in view of the position discussed above, it may be noted that the amendments introduced in the procedure of voting system through the SRO 906(1)/2023 dated July 7, 2023 being “ultra vires” the specific provisions contained in sections 159 and 166 of the Companies Act, 2017 are neither workable nor in the interest of minority shareholders. In fact, the newly-introduced amendments have defeated the basic theme of the ‘cumulative voting system’, which was a very simple and time-tested procedure in the field since 1972. The existing system provided under section 159 of the Act takes care of the interests of minority shareholders which, as a result of division of votes during the election process, enable them to secure their representation by electing few members on the Boards of respective companies.
So far as the appointment of independent and a female director is concerned, it may be considered in light of the prevailing corporate culture in our country and the ground realities. In this context, this writer had already highlighted through his comments on the draft of proposed amendments that when so-called independent directors and a female member are elected with the support of voting powers possessed by the majority group of the company’s sponsors, the independent position of such directors is necessarily compromised from the day one of their appointment. Therefore, this writer had recommended that following the policy/practice of Singapore, the appointment of independent directors including a female director may be left to the elected Boards of listed companies. The Board of the respective company must have the privilege to select the persons of their choice from the ‘databank’ maintained by the Pakistan Institute of Governance (PICG) or some other institution nominated by the SECP. In support of this recommendations, the writer had quoted provisions of the Act related to appointment of Chief Executive of a company, which permits the elected Board of the company concerned to nominate/appoint a person from amongst the elected directors or any outsider fit and proper professional, of their choice may be selected from the market. The person so appointed by the elected directors need not even be shareholder of the respective company. Similarly, the representation of a female should be on merit and the Board be allowed to elect a qualified person from the data maintained by the PICG. If the SECP carries out a survey and breaks down the female representation on the Boards of PICs, it will find out that a large majority of female Boards’ members are close relatives of the respective Boards members who irrespective of their qualification or fitness for the highly responsible position were elected/appointed just to fill up seats reserved for females on their Board and not realizing if they are able to contribute towards improvement of the company’s performance. In my view, it has defeated the very purpose of imposing such specific quotas on Companies.
In fact, there is hardly any opposition in taking women on the Boards of listed companies if they possess the requisite qualifications, experienced and justify for holding such position and the role to be played as director of a big corporation particularly to protect the interest of investors and creditors. It may, therefore, be noted that to run/manage a company is altogether different from the functions of a Union Council, an NGO or a Club, where it is considered necessary to allocate a specific quota for representation of females. On the other side, it has been observed that on certain Boards, females possessing appropriate professional qualification have been appointed as directors, who are performing successfully as a part of the management and it is being appreciated at all levels.
In light of the position discussed above, this writer is of the view that independent directors selected from the databank of ‘PICG’ and making them part of the Board need not even be members of the companies like a Chief Executive hired from the market. The sponsors’ directors, whose financial stake is involved and at risk, must have the right to select the team members from the panel of experts. Similarly, a sufficient number of qualified females in the field of accounting, legal, business administration and IT etc. are available, who may seek registration with the PICG and the listed companies may be allowed to identity the suitable persons to be appointed as directors who are able to contribute towards improvement in performance of the company and to protect the interests of its shareholders, creditors and employees. At the end, it is also recommended that the number of independent directors including females on the Board of a company should be fixed upto three only without any discrimination of genders. It may, however be kept in mind that in order to proceed towards the right direction, suitable amendments would have to be made in the respective laws.-Courtesy: Business Recorder