The Hindu Business Line : Democratise the boardrooms

The first-past-the-post system which characterises our elections throws up strange results — a party or a combine that has secured, say, 30 per cent of the votes gets, say, 50 per cent of the seats.

In other words, the party which just surges past others secures for itself a disproportionately greater number of seats, and, on the flip side, the party which was pipped to the post gets a disproportionately fewer number of seats. This rankles.

Small wonder the loser rues the system but does precious little to change it.

The reason is not far to seek — it bides its time to take a perverse advantage of the same system that has done it in this time round. But the same festering inequity that characterises the more rarefied corporate world is somewhat inexplicable.

A group controlling 51 per cent of the voting power can pack the board entirely with its nominees whereas the one controlling the remaining 49 per cent is left holding the can. This happens because the company law requires each candidate to be voted in or voted out.

Suppose there are three vacancies on the board because of retirement and there are five contestants for these three seats with the retiring directors seeking re-election. The other two may be the minority group's candidates. Now the latter do not stand a ghost of a chance.

The five resolutions would be put to vote individually with predictable results — the first three would win backed as they are by the majority howsoever thin and the latter two would have to bow out lacking as they do the extra 2 per cent of the votes which those in the saddle have.

Lack of representation on the board keeps the minority away from the crucial decision-making exercises given the fact that the board exercises plenary powers. This regime is just plain undemocratic. Many of the states in the US have mandated a system of proportional representation.

In India, Section 265 of the Companies Act makes this regime optional. In other words, it is for a given company to embrace this system by incorporating in its Articles a clause facilitating this.

In the absence of such a clause, the majority rule would prevail. And in the absence of a mandatory requirement in law, no company worth its name seems to have embraced the system, equitable as it is, voluntarily.

There is no reason why the company law cannot be amended to make proportional representation on the board mandatory.

That it is at once fair and simple to administer and should commend itself for universal adoption. Consider this. Let us say there are 100 shares in a company, with group A holding 51 and group B the remaining 49. Now if there are five directors to be elected, group A and B will have 255 (51 multiplied by 5) votes and 245 (49 multiplied by 5) respectively. By voting tactically, B can ensure two of its nominees win with the remaining three seats being bagged by A.

This is a vast improvement in the fortunes for B because under the existing regime, the boardroom would be out of bounds for it despite the shareholding clout that nearly matches its rival.

Detractors of the regime of proportional representation decry it on the ground that it would convert the boardroom into a battleground, casting directors in an adversarial mould.

Debate is the essence of democracy. Checks and balances may slow things down but they are any day better than leaving the field open for abuse and self-aggrandisement.

Another amendment is also called for in the context of boardroom manoeuvres. Foreign companies often, almost invariably, arm-twist their Indian collaborators vide the shareholders' agreement to give them the veto power — no board resolution can be passed without the say-so of the foreign collaborator.

So what if he does not have majority on the board and so what if he has only 26 per cent of the voting power. This tyranny of the minority must also be put an end to.