Small investors lack capabilities, resources and motivation to exercise their voting rights in the general meetings. But, block holders (who hold more than five per cent shares) and institutional shareholders have the capacity and resources to analyse the outcome of a proposal on the performance and governance of a company. Therefore, it is their solemn duty to exercise the right. However, institutional shareholders sometimes abstain from voting.
Even in the highly-publicised extraordinary general meetings (EGMs) of Tata Group, which were held last December to remove Nusli Wadia as an independent director, voting by the institutional shareholders was 75.02 per cent in Tata Steel, 69.23 per cent in Tata Motors and 57.08 per cent in Tata Chemicals. This implies that some institutional shareholders were abstained from voting. With electronic voting, cost of exercising the right is almost zero. Therefore, the only reason for abstaining is that institutional shareholders do not want to take a position in a controversial issue or where two powerful groups are involved, as voting either way might hurt its own business interest. In the process it hurts the interest of its shareholders, unit holders or policyholders, as return on investment in an investee company depends on quality of governance and management of that company.
At the macro level, abstaining from voting hurts the country, as shareholders' activism improves the quality of corporate governance. As the institution of independent directors is inherently weak, only shareholders’ activism can protect the interests of minority and other stakeholders.
As on September 30 last year, the promoter group controlled 32.43 per cent of Tata Motors, 31.35 per cent of Tata Steel and 30.80 per cent of Tata Chemicals. On December 13, Tata Group
had acquired an additional 1.73 per cent shares in Tata Motors. Therefore, it is no surprise that resolutions to remove Wadia were passed with significant majority. In case of Tata Steel, 90.80 per cent of votes were in favour of removing Wadia. In case of Tata Motors and Tata Chemicals, 71.20 per cent and 75.67 per cent votes were in favour of the removal. Had the company law required special resolution (three-fourth majority) for removing an independent director, Wadia could not have been removed from Tata Motors and Tata Chemicals. It would have been a close call. It might be appropriate to debate whether, in order to protect the independence of independent directors and to strengthen the institution of independent directors, the law requires a special resolution for removal of independent directors.
Primary responsibility of independent directors is to protect the interest of non-controlling shareholders (commonly called minority shareholders). Therefore, it is appropriate that minority shareholders should have significant say in the removal of independent directors. For example, in case of Tata Chemicals, 51.45 per cent of the votes of institutional shareholders went against the resolution for removal of Wadia, but that was not reflected in the overall result. In case of Tata Motors, institutional shareholders were almost equally divided. Only 49.94 per cent of the institutional shareholders’ vote went against the resolution. However, the story was different in Tata Steel. At least 82.48 per cent of the votes of institutional shareholders went in favour of the resolution.
When the controlling shareholder proposes to remove an independent director, its 100 per cent vote is polled in favour of the resolution. Therefore, it is easy to pass an ordinary resolution (simple majority). For example, if 30 per cent shares are held by the controlling shareholder, the ordinary resolution will be passed even if all public shareholders vote and 70 per cent of their votes go against the resolution.
It is reasonable to assume that 70 per cent vote of the institutional shareholders and five per cent vote of the public shareholders are generally polled. In that situation, if institutional shareholding is 40 per cent or less, the resolution will be passed as an ordinary resolution even if all the votes of institutional shareholders and other public shareholders go against the resolution.
With those assumptions, if institutional shareholders hold 10 per cent or less voting rights, the resolution will be passed as a special resolution even if all public shareholders (including institutional shareholders) vote against the resolution. If, institutional shareholders hold 40 per cent voting rights, the resolution will be passed as “special resolution” even if around 50 per cent of votes of the public shareholders (including institutional shareholders) go against the resolution. Therefore, there is a strong case for a mandate that the resolution for removal of independent directors should be treated as a “special resolution”.
The writer is adjunct professor in IMT-Ghaziabad & chairman of Calcutta Riverside Academy