FROM the board of directors of the Pakistan Stock Exchange to those of the companies listed on the stock exchange, appointing and empowering independent directors are all the rage these days.

The Code of Corporate Governance of 2017 has introduced a requirement to appoint at least two members or one-third of the board members, whichever is higher, as independent directors.

In contrast, the 2012 code required mandatory appointment of at least one independent director and encouraged appointment of at least one-third board members as independent directors.

‘Jama Punji’ is an initiative undertaken by the Securities and Exchange Commission of Pakistan (SECP), the apex regulator, to provide information (mainly to small investors) about the pros and cons of putting their money in the capital market, pension funds, mutual funds, real estate investment trust, leasing companies, investment banks and bonds.

Empowering minority shareholders to occupy places on company boards has been met by enormous resistance from powerful sponsoring directors

The initiative, which every listed company is required to include as part of their annual accounts, specifies the rights of shareholders in companies which include right to elect and remove directors, right to appoint and remove auditors, the passing of special resolution at a general meeting, right to contest election to the board of directors, right to residual assets at the time of winding up and the right to receive copies of annual accounts.

Shareholders have been advised to “keep a watchful eye” on the affairs of the company and ensure that the management is acting and performing its duties in compliance with the provisions of law and in the best interests of the shareholders.

But the small voiceless presence of minority shareholders at company meetings scarcely has an option but to allow the boards to approve all ‘special resolutions’, regardless of its impact on company’s future.

Section 185 of the Companies Act of 2017 prohibits distribution of “gifts” to shareholders present at the meeting. But it suits both the company boards as well as the small number of minority shareholders who are pleased to receive these gifts worth a few hundred rupees and in exchange for their consent to company resolutions that could involve millions and billions of rupees in debatable investments and even lending to associated undertakings.

The kind of shareholders’ activism witnessed on Wall Street or other regional developed markets has yet to take root in our capital markets. However, regulators say they have moved to frame laws that give minority shareholders the voice that would be heard.

The Code of Corporate Governance, which is a part of the listing regulations of the stock exchange, has made it mandatory for companies to offer one seat to an independent minority director.

The Companies Act of 2017 provides that all listed companies “shall encourage effective representation of independent non-executive directors, including those representing minority interests, on their board of directors”.

While the non-executive director has been allowed to enter the board room, the doors still remain shut for director representing minority interests. The regulations require listed companies “to take necessary steps — such that the minority shareholders as a class are facilitated to contest election of directors by proxy solicitation”.

It is understandable that empowering minority shareholders to occupy places on company boards has been met by enormous resistance from powerful sponsoring directors. Some corporate experts say that the attempt to settle a minority shareholder on the corporate boards is well intentioned but seems impractical.

“Minority shareholders are disorganised. Moreover, electing a candidate through cumulative voting by stockholders is a difficult task,” an expert says. On the other hand, the sitting sponsor directors would be perfectly pleased to put a puppet on the board.

In order to have effective representation of minority shareholders on company boards, when the disorganised minority interest is unlikely to agree on an individual, many market experts suggest a class action by minority shareholders to be led by mutual funds in place of individuals.

Mutual funds have come to occupy a prominent place among stock market participants. However, corporate regulators are unlikely to recognise the representatives of mutual funds as the representatives of minority shareholders since they represent unit holders, and almost all leading funds are owned by big banks, an apparent conflict of interest.

The SECP has set up a task force to identify weaknesses and gaps in the current protection mechanism for the shareholders of companies and to suggest ways and means to overcome these through shareholder activism.

The regulator last year notified the draft of Listed Companies (Code of Corporate Governance) 2017 under the newly promulgated Companies Act of 2017.

Noteworthy requirements of the regulations include decreasing the limit of permissible directorship in listed companies from seven to five. A significant requirement of the new act is to prescribe at least one female director on the board.

Published in Dawn, The Business and Finance Weekly, March 5th, 2018