PRESENTATION ON

CORPORATE LAW

TOPIC: SHAREHOLDER’S DEMOCRACY

PRESENTED TO: MS.SANTHI NARAYAN

PRESENTED BY: REDWAN UR RASHID

SALMAN RASHID ADITYA SAHAI

HARISH SHARMA SHUBHAM SETHI

Definition: Shareholder democracy is the ability of

shareholders to influence a board of directors through the exercise of voting rights associated with share ownership. The scope of shareholder voting rights and how they can be exercised has a significant impact on confidence in the capital markets. The SecurityCommission is taking steps to help increase shareholder engagement by strengthening shareholders’ rights and facilitating the effective exercise of voting rights.

Elements of Shareholder’s democracy The appointment of a chair or lead director

who is independent of management Holding annual director elections with

individual director by director votes Implementation by the board of a “majority

voting” policy Detailed disclosure of voting results for

director elections, and The holding of an annual ‘Say on Pay’

shareholder advisory vote.

continued. Majority voting in uncontested elections. Brokers disallowed from voting in uncontested

elections. Investor right to nominate directors (“proxy

access”). Investor vote on executive compensation (“say on

pay”).

explainations_- majority voting Shareholder advocates believe that plurality

voting lowers governance quality by insulating directors from investors.

They advocate a stricter standard—majority voting—under which directors must receive 50% of the votes to be elected.

The impact of majority voting on governance is unclear. Dissenting votes are often issue-driven and not personal to the director (e.g., vote against directors on comp committee to protest CEO compensation levels).

This might inadvertently work to remove directors who bring important strategic, operational, or risk qualifications.

Broker nonvotes. Shares held at a brokerage firm are registered

in the name of the broker, even though they are beneficially owned by individuals.

If the broker does not receive proxy instructions from the investor within 10 days of the vote, a “nonvote” occurs.

NYSE Rule 452 allows brokers to vote these shares for “routine” matters but not for “nonroutine matters”.

Historically, uncontested director elections were considered routine. In 2009, they were reclassified as nonroutine.

Proxy access Historically, the board of directors has had sole authority

to nominate candidates whose names appear on the proxy.

Following Dodd-Frank, shareholders or groups of shareholders owning 3% or more of a company’s shares for at least 3 years are eligible to nominate up to 25% of the board.*

Proxy access (or the threat of proxy access) is likely to increase the influence of activist investors over boards.

Example -Historically, the board of directors has had sole authority to nominate candidates whose names appear on the proxy.

Following Dodd-Frank, shareholders or groups of shareholders owning 3% or more of a company’s shares for at least 3 years are eligible to nominate up to 25% of the board.*

Proxy access (or the threat of proxy access) is likely to increase the influence of activist investors over boards.

Say on pay Shareholders are given an advisory

(nonbinding) vote on executive or director compensation.

Variations of “say on pay” have been enacted in the U.S., U.K., Netherlands, Australia, Sweden, Norway and India.

Under Dodd-Frank, companies are required to hold a nonbinding say-on-pay vote at least every 3 years.

Shareholder’s democracy In theory, shareholders should be in a strong

position to influence the structure of governance systems.

In practice, shareholders have limited influence, and in some cases they have conflicting agendas.

Regulators have attempted to increase the influence of shareholders by mandating elements of “shareholder democracy.”

However, shareholders tend to react negatively to these regulations. A positive impact on governance quality has not yet been demonstrated.

ADVANTAGES OF DEMOCRACY

Peaceful Modifications in the COmpany Democracy can offer modifications in company without hostility. In a

democracy, authority can be reassigned from one party to another by the mode of elections. The power of the general public of a country decides its ruling power.

Averting Monopoly Furthermore, any company is confined to an election tenure after which it has to

contend against other parties to recover power. This method averts monopoly of the reigning party. The reigning authorities have to ensure it functions effectively for its people as cannot continue being the authority subsequent to carrying out its term unless re-elected by the people.

Feeling of Gratitude This inculcates a feeling of responsibility towards the citizens. The reigning

party owes their accomplishment in the elections to the people of the country. This leads to a feeling of thankfulness towards the citizens. It can act as their inspiration to function for the people for it is the general masses that have absolute authority over selecting their government.

Social Responsibility of the Citizens An additional vital advantage of democracy is that the citizens achieve a sense

of contribution in the procedure of selecting their government. They get the chance to speak out their views by method of electoral voting. This gives ascend to a feeling of belongingness in the brains of the masses towards their society and its well being.

DISADVANTAGES OF DEMOCRACY Making the wrong choice In a democratic country, it is the common man who has the supreme right

to choose their legislature and their prevailing authorities. As per a general study, not all the people are completely conscious of the political circumstances in their nation. The common masses may not be acquainted of the political matters in their society. This may lead to common man taking an erroneous selection during election.

Authorities May Lose focus As the company is bound to changes and modification after each election

tenure, the authorities may function with an interim objective. Since they have to go through an election procedure after the conclusion of each tenure, they may lose focus on functioning effectively for the citizens and instead might concentrate on winning elections.

Hordes Have Influence A further disadvantage of democracy is that hordes can manipulate

citizens. People may vote in support of a party under the pressure of the bulk. Constrained or influenced by the ideas of those around, an individual may not put across his/her accurate judgment.

Democracy averts radicalism and encourages teamwork and synchronization. It also slows things down, stops those in authority doing what they

 

Democracy’s future in corporate world .

A company can also be understood as a form of government which is governed by the directors, and the shareholders are the voters who take part in the election process and elect the board of directors who can be equated with the Parliament or senate of any country. It is an internal mechanism of a company to govern itself but this also follows the principles of democracy for its efficient running, allowing a say of every member and to create a check and balance system. One of the ways to participate in this democratic process is by way of proxies where the member is unable to come and the meeting. But like as it has been stated earlier that there are arguments in both favor and against proxies. But if we have to imbibe the principles of democracy in our corporate culture then it is necessary that every eligible member should make active efforts to participate in the decision making process of the company whereas the state should take responsibility to make laws which facilitates this process. By strengthening the instrument of proxy it is possible to come over the hurdles, defeat the lacunas of proxies and revert back the title of ownership to the shareholders. This system would also improve check and balance system in the organization, which would result in greater efficiency of the management and will reduce the incidence of frauds and misrepresentation. This information level of the proxies need to be increased as if this group or category of people are participating in the most vital aspect of democracy, then they need to be properly informed in order to take correct decisions.

THANKYOU