The Securities & Exchange Commission of Pakistan (SECP) has recently published a report on ‘enhancing transparency and efficiency’ of the shareholder meetings, seeking public comments on it. It recommends changes for conducting shareholder meetings, election of directors, issues related to proxies, voting processes, and monitoring mechanisms.

According to the report, redressal of issues faced by minority shareholders and effective participation by the institutional investors may go a long way in improving the listed companies’ transparency, efficiency and governance through greater participation of minority shareholders in the management and policy decision-making.

The report has been prepared by a 10-member committee led by Asif Ali Qureshi, the CEO of Optimus Capital Management. It is a comprehensive review of how shareholder meetings by listed companies are conducted.

In Pakistan, most businesses are family-owned. That means the sponsors or promoters of a firm — including the listed corporate entities — tend to maintain family control over the management and strategic business decision-making by holding the majority share in their own hands, as well as through election of directors they can maintain influence over and keep the minority shareholders away from participating in management and decision-making.

Small shareholders in family-owned private companies struggle with board representation, voting rights, and decision-making involvement, states a recent SECP report

For effective shareholder meetings, the report proposes that companies should ensure their shareholders can engage in business meetings, whether held physically or in a hybrid format and are allowed to raise questions pertinent to the meeting agenda.

The report states the company board composition and “corporate governance issues can’t be viewed in isolation,” adding further: “The dominance of sponsor directors on the boards of the listed firms in Pakistan, while arguably less desirable, is intricately tied to with the country’s social, legal and financial ecosystem besides specific circumstances of individual companies.

“The overall ecosystem is defined by the state of development of private enterprise, capital markets, banking sector and legal system as well as cultural factors.”

This is manifested in a relatively low overall market free float of less than 27 per cent. Moreover, only 15pc of the total listed companies have a free float of more than 50pc.

“With skewed risk-reward distribution between sponsor and minority shareholders, there is a tendency for sponsors to retain greater control over the boards of their companies. The ownership structure and board composition of companies are closely linked with the level of development of economies and capital markets of their home countries.”

Shareholder meetings are the only formal structure involving minority shareholders in governance, strategic decisions, accountability of the boards, and management of companies.

The report emphasises that the quality of shareholder meetings reflects the company’s commitment to attaining higher standards of corporate governance. “By prioritising transparency, engagement, and adherence to legal and regulatory requirements, companies can not only enhance the effectiveness of their shareholder meetings but also build trust among stakeholders.”

The report suggests that by fulfilling regulatory requirements, well-organised shareholder meetings can make the minority shareholders feel included as they learn more about the company’s performance and business strategy, as well as by exercising their fundamental right to vote on important company matters such as election of directors, approval of annual accounts, capital restructuring, amendments in articles and memorandums.

The report says it has been noted that the companies delay election of directors upon the expiry of the term of office, and the reasons for the delay are sometimes not publicly disclosed.

Delays in holding the election of directors are more common in the case of state-owned enterprises (SOE), although private companies also sometimes push board elections beyond the due date. In the case of the SOEs, the delay in elections is generally at the behest of their line ministries.

The SECP/company registration office (CRO) seem to have adopted a softer stance towards delays in electing directors by SOEs, allowing them successive extensions even after issuing directives to hold director elections on/by a specified date.

Sometimes, private companies also delay board elections, particularly in situations where the sponsor shareholders fear losing majority control of the board or when they suspect that some ‘unfriendly’ minority shareholders may be in a position to have their representatives elected as directors even if the sponsors would continue to retain the control of the board.

Delay tactics are used to negotiate with such shareholders to dissuade them from contesting board elections themselves or through proxies.

Furthermore, it has been noted that the nomination papers of contesting candidates representing minority shareholders are sometimes rejected by companies on arbitrary grounds. Such rejections often lead the aggrieved contestants to move to courts that may grant an injunction against holding the election of directors till the final decision.

The Code of Corporate Governance requires that minority shareholders, as a class, shall be facilitated by the board to contest the election of directors by proxy solicitation. However, local business groups, including some large conglomerates, are generally averse to the idea of meaningful outside representation on the boards of companies wherein they are the largest shareholders.

To keep the minority shareholder representation on boards minimal, company sponsors employ various tactics to discourage them from fielding their candidates in the election of directors.

In view of these issues, the committee has recommended wide-ranging reforms to ensure that a calendar/record of director election of all listed companies should be published on the PSX website for greater transparency and to provide sufficient lead time to shareholders for preparing and participating in the election of directors.

The delay in the election of directors shall only be permitted under extraordinary circumstances (eg, natural calamity or court injunction) that are beyond the company’s control. Delay for any other reason should be swiftly penalised by the SECP with directives issued and enforced by the CRO/SECP for holding the election by the subject company at the earliest possible date.

The scope of work for the scrutiniser, appointed by a company in a general meeting in which the election of directors is to be held, should be expanded to include the scrutiny/verification of nomination papers of candidates contesting the election of directors.

The scrutiniser shall also review due diligence carried out by a company on nominations filed for candidates in the independent directors’ category. The acceptance or rejection of the nomination of any candidate should be the scrutiniser’s responsibility.

This will enhance the transparency of the process, prevent unjust rejection of nominations and reduce the risk of legal challenges to the election of directors.

The criteria and process for the number of nominee directors on a board should be defined with clarity, especially in the context of category voting for the election of directors. The appointment of nominee directors either by creditors or other special interests under contractual arrangements must not put minority shareholders at a disadvantage by increasing the shareholding threshold required for electing a director.

Moreover, a nominee director must possess basic qualifications, experience and expertise. Contesting an election of directors should be made possible via the e-governance portal to make the process transparent while allowing the shareholders to nominate contestants easily. Complete credentials and profiles of contestants should be visible via the directors’ database for transparency and effective voting.

It has been suggested that the voting scheme under the category of voting regime must be revised. Instead of distributing a member’s total votes (shares held by him/her multiplied by the number of directors to be elected) across the three enumerated categories, they should be assigned votes on a consolidated/aggregate basis.

The shareholder may choose to give to a single candidate in any category or distribute among multiple candidates in the same or different categories to remove the apparent inconsistency between the Companies Act and the Code of Corporate Governance, increase the competition in the election of directors across all categories, and provide a more levelled field for minority shareholders to have board representation.

Published in Dawn, The Business and Finance Weekly, March 4th, 2024