Cumulative Voting, The Need For Effective Corporate Democracy; A Case For Its Adoption In Nigerian Corporate Practice By Confidence Amuda Esq.

By Confidence Amuda Esq. INTRODUCTION The protection of minority shareholders within the domain of corporate activity is one of the major problems facing company law. The law is torn between striking a balance between effective control of the company and the interest of minority shareholders. Under company law jurisprudence, the powers of the company are vested in the Board of directors and members in general meeting. However, on a closer study of the day to day working of the company, it is discovered that most decisions which affect the day to day running of the company is taken by the Board of directors. In traditional times which mainly focused on the straight forward voting, there is little or no representation for the minority shareholders in the board. This means that the board was mostly comprised of those voted in by the majority shareholder(s). The hardship encountered by minority shareholders can be better showcased with a hypothetical scenario. In Optimum Inc. there are two shareholders, shareholder A has 60% of the 100 shares of the company and shareholder B has 40% of the 100 shares in the company. If in an election, the company wants to elect 3 members into the board. With the adoption of the traditional straight forward voting, shareholder A has 60 votes to cast for director 1, 2 and 3 respectively. The resultant effect of this is that shareholder A’s 60 votes will beat shareholder B’s 40 votes in electing the 3 members of the board. This then means that the board will be composed mainly of the preferred candidates of shareholder B with no representation whatsoever for the minority shareholder B thereby prejudicing his interest. It was in a bid to inject some level of protection for the minority shareholder that cumulative voting in election of company directors was introduced into corporate law practice. This article is dedicated to the study of the working and effect of cumulative voting with practical examples of countries where it is practiced and will conclude by providing reasonable insights on why it should be adopted in Nigeria. WHAT IS CUMULATIVE VOTING? Cumulative voting or proportional voting is the procedure of voting of a company’s directors; each other entitled to one vote per share multiplied by the number of directors to be elected. This helps strengthen the ability of minority shareholders to elect a director. This method allows shareholders to cast all their votes for a single nominee for the board of directors when the company has multiple openings on its board. Thus where multiple candidates are running for a seat at the board, each shareholder can choose between voting for a single candidate and splitting their votes between multiple candidates. Using the example of Optimum Inc. giving earlier, assuming that in the election of the directors to fill the 3 seats at the board, shareholder A have 60 shares out of the 100 shares of the company while shareholder B will have 40 shares. With the adoption of cumulative voting, shareholder A having 60 shares is entitled to 60 votes times the number of seats sought to be filled making it a total of 180 votes, shareholder B having 40 shares is entitled to 40 votes times the number of seats sought to be filled which will be 120 votes in total. Cumulative voting implies that the two shareholders may choose to cast all their votes as he deems fit. They may allocate all votes to a particular candidate or may split them across the several candidates as they deem fit. In other to secure a seat at the board, shareholder B may choose to cast all his votes on a single nominee. The effective adoption of cumulative voting benefits minority shareholders by allowing them to focus all their votes on a single candidate. If multiple minority shareholders work together, they can often cause a change or win an appointment despite being outnumbered. The implementation of this proportional voting system has recorded tremendous results in countries where it is being practiced. A cursory look at some of these countries will be undertaken in this article. CUMULATIVE VOTING IN USA Whether a corporation is required to adopt cumulative voting and the manner in which the corporation is permitted to adopt cumulative voting are governed by the laws of the state where the company is legally incorporated. Each state has its own provisions regarding cumulative voting in board elections. Cumulative voting was not adopted in USA until 1870 when the state of Illinois adopted a new constitution requiring cumulative voting to be adopted in voting in new directors into the board of Illinois corporations. With Illinois taking the lead, other states also adopted laws mandating the use of cumulative voting in corporate elections. Most states’ laws on cumulative voting are of four types. The most prevalent type allows cumulative voting if a provision for it exists in the corporations articles of incorporation. The second most popular type requires cumulative voting unless the article of incorporation expressly prohibits it. The next type allows cumulative voting to be adopted or prohibited through the company’s bylaws and the fourth type mandates all companies to use cumulative voting for the election of their board of directors. CUMULATIVE VOTING IN INDIA Indian companies are allowed to provide in their articles of association that cumulative voting should be adopted in the election of company directors where there are more than one seats to be filled in the board. This system was previously provided for in section 265 of the Old Companies Act 1956 and is currently contained in section 163 of the new Companies Act of 2012. This proportional voting system was adopted by GSK Consumer Healthcare ltd. (GSK CH) in the appointment of its directors. However, despite the overemphasized advantages of cumulative voting, almost none of the listed companies have moved towards a cumulative voting system, it is submitted that this situation is largely due to its non mandatory provision as such it is suggested that the Indian legislature amend their Company’s Act and make it a mandatory requirement where a company wants to fill multiple seats on its board. CUMULATIVE VOTING IN CHINA Cumulative voting was introduced in China as a form of experiment to some listed companies. The experiment recorded huge success as a result of which the Chinese Securities Regulatory Commission in 2002 released the Code of Corporate Governance for Listed companies aimed at elevating minority shareholder rights and improve corporate governance. Following this introduction, cumulative voting was provided for in the Article 106 of the companies’ law of China. This is to the effect that for the purposes of election of directors or supervisors by the shareholders general assembly, the system of cumulative voting may be practiced in accordance with the provisions of the company’s articles of association or a resolution by the shareholders’ general assembly for its adoption. The effect of this statutory provision is that cumulative voting is not mandatory in China but may be adopted where the articles of association of the company provides for it or if there was a resolution passed by the shareholders’ general assembly in favour of the adoption of cumulative in the election of its directors where there are multiple seats to be filled. A CASE FOR THE ADOPTION OF CUMULATIVE VOTING IN NIGREIAN CORPORATE GOVERNANCE So many arguments have been proffered for and against the adoption of cumulative voting in the election of company directors. The opponents of the adoption of cumulative voting contend that the system will lead to distortion of the board in the sense that directors elected by the minority with the use of cumulative voting will not represent all shareholders thereby leading to factionalism and will feel accountable to only a specific segment of shareholders and therefore inclined to address their interests and desires first. I respectfully submit, that the above view is misguided in that in straight forward voting, the entire board represents the interests and preference of the majority shareholder(s) allowing a minority shareholder one or two seats on the board will not holt the boards performance but will increase accountability and diffusion of ideas. With the recent skepticism about the nature of corporate boards and practices which results in malfeasance, lack of accountability and transparency, inadequacy and weak enforcement of existing laws, the adoption of cumulative voting system in Nigeria will create room for minority shareholders to be fairly represented on the board and can at least have a say in the management of the company.]]>