Do minority shareholders have the right to appoint their own representative on the Board? Are they restricted to the recommendations by the Board only?

The Companies Act does not prescribe the manner in which directors are to be appointed to the Board. The appointment of directors is left generally to the company’s articles of association. Typically, directors are elected by the members at the annual general meeting of the company. Accordingly, minority shareholders alone are unable to elect a representative to the Board as they do not possess the requisite voting power to pass a resolution appointing a representative to the Board.

Rationale for not mandating representation of minority shareholders on the Board

A common reason for not requiring representation of minority shareholders on the Board is that it would lead to procedural inefficiency as the Board’s decision making might be hampered by disagreements. Additionally, there is a question as to what percentage stake is enough of a stake in the company to justify having such a significant input in the running of the company. It has also been noted that large shareholders can potentially improve the monitoring of management because of the alignment of their respective interests. On the other hand, Boards that comprise directors who represent significant shareholders are in a position to expropriate from minority shareholders with less committed representation.

Proportional representation on the Board

A cumulative voting system will provide for a more proportional representation on the Board. Under that system, the number of shares held by a member is multiplied by the number of vacancies, and the member may cast for a single candidate the total number of votes calculated this way, or may distribute the votes among several candidates as desired. However, it should be noted that cumulative voting for the election of directors was not recommended during the recent review of the Companies Act because of reservations on the effectiveness of the cumulative voting system.

The role of independent directors

The Code of Corporate Governance (the “Code”) which applies to publicly listed companies defines an “independent” director as one who has no relationship with the company, its related corporations, its 10% shareholders or its officers that could interfere, or be reasonably perceived to interfere, with the exercise of the director’s independent business judgement with a view to the best interests of the company. Independent directors are essential in protecting the overall interests of the company. They provide guidance, supervision, as well as checks and balances for effective corporate governance.

There has, since the late 1980s, been a growing awareness of the role of independent directors in protecting minority shareholders’ interests. They were first introduced when audit committees became part of the corporate landscape. During the 2005 review of the Code, it was proposed that the definition of independent director exclude directors who are, or directly associated with, substantial shareholders. However, this was not adopted as the Government concluded that substantial shareholders do not pose the kind of principal-agent problems that executive directors can potentially pose. Arguably, substantial shareholders of a company will, more often than not, have their interests aligned with those of other shareholders as they have a greater stake in the success of the company.

During the 2011 review of the Code, this changed and it was acknowledged that to enable independent directors to act effectively in companies, independent directors should not possess any relationship with substantial shareholders. This was because relationships with substantial shareholders may influence an independent director’s exercise of objective judgement.

The Code additionally emphasizes that no individual or small group of individuals should be allowed to dominate the Board’s decision making. There should be a strong and independent element on the Board, with independent directors making up:

i. at least one-third of the Board; or
ii. at least half of the Board where (i) the chairman of the Board and the CEO is the same person; (ii) the Chairman and the CEO are immediate family members; (iii) the Chairman is part of the management team; or (iv) the Chairman is not an independent director.

Other options available to minority shareholders

a. Voicing concerns
A lack of board representation does not mean that minority shareholders are relegated to passively following what the Board recommends. The Code recommends that the Board should establish and maintain regular dialogue with shareholders, to gather views or inputs, and address shareholders’ concerns. Minority shareholders may also attend general meetings of the company to voice their concerns. In this regard, the Code recommends that companies should encourage greater shareholder participation at general meetings, and allow shareholders the opportunity to communicate their views on various matters affecting the company.
b. Calling or requisitioning a meeting
Under the Companies Act, two or more members holding not less than 10% of the total number of issued shares of the company may call a meeting of the company. Notwithstanding a company’s articles of association, minority shareholders holding not less than 10% of the paid-up capital of the company may also requisition the directors to convene a meeting. The requisitioning of a meeting is usually preferred as most individual members seldom possess the means to call a meeting of large companies. Unfortunately, the calling or requisitioning of a meeting is of limited effectiveness as minority shareholders will probably lack the necessary votes required to pass any resolutions tabled.
c. Nominee directors
Minority shareholders may also propose nominee directors to the Board. However, a nominee director is not entitled to prefer the interests of his principal at the expense of the interests of the company. As noted above, minority shareholders may find it difficult to appoint nominee directors as they lack the requisite voting power.

Comparison with other jurisdictions

a. Two-tier Boards
Under the two-tier Board structure, there exist two Boards: a management Board and a supervisory Board. This structure can be seen in German companies, where the supervisory Board members are either shareholder representatives or labour representatives. In Singapore, only one single Board exists. All Board members are normally elected by the shareholders. A two-tier Board, in principle, achieves a stricter separation of control from management though the flow of information and the decision-making process is swifter in a one-tier Board.
b. Minority representation on Boards
The mandatory representation of minority shareholders on the Board is provided for in some jurisdictions. For example, in Italy, it is mandatory for listed corporations to reserve one Board seat for minority shareholders.