Corporate board elections

Introduction: A reform that misses the mark
In July 2023, the Securities and Exchange Commission of Pakistan (SECP) amended the Code of Corporate Governance through S.R.O. 906(I)/2023, introducing a new regulation (7A) that mandates separate, category-wise voting for director elections in listed companies. Ostensibly designed to streamline compliance with board diversity requirements—such as the presence of female and independent directors—this amendment has produced the opposite of good governance.
Rather than fostering inclusion or transparency, these reforms have imposed severe procedural limitations on minority shareholders, undermining the time-tested cumulative voting method enshrined in the Companies Act, 2017. As a result, the amended framework risks institutionalizing majority dominance and relegating shareholder democracy to a symbolic formality.
The case in point: an unwinnable election
In 2024, a minority shareholder controlling 12.51 percent equity in a listed company prepared to contest upcoming board elections under Section 159(3) of the Companies Act. With seven board seats available and the company's free float limited to 25%, the shareholder aimed to secure one board seat —an achievable strategy under the earlier cumulative voting framework that allowed aggregation of votes to elect at least one director.
However, the company's new voting process, aligned with Regulation 7A, subdivided the election into three separate categories: female, independent, and other directors. Critically, it rigidly allocated voting rights to each category based on the number of seats designated for that group. For the 'Other Directors' category — where the minority nominee had filed — this meant that a candidate needed at least 20.10 percent of the total votes to win a single seat.
In a company where the controlling shareholders held over 75% of the voting power, the outcome was a foregone conclusion. Even with controlling 12.51% equity, the minority shareholder found the contest practically unwinnable. Facing a futile effort, the nominee withdrew his candidacy. The company subsequently announced that all remaining candidates stood unopposed — rendering the election process an administrative formality.
The problem: a procedural lockout
This episode is not an isolated event, but a clear illustration of the deeper structural flaws introduced by the 2023 reforms:
— Voting power is fragmented: By dividing voting into fixed categories, Regulation 7A prevents shareholders from strategically allocating their full voting strength—effectively neutralizing minority influence.
— Cumulative voting is undermined: While the Companies Act guarantees cumulative voting to empower minority blocs, the new mechanism bypasses this intent by introducing category-based segmentation, which is arguably inconsistent with Sections 159 and 166 of the Act.
— Uncontested elections are now the norm: The separation of ballots makes it easier for controlling shareholders to fill reserved seats (e.g., for female or independent directors) without competition, thereby complying with the letter of the law while violating its spirit.
— Independence is compromised: Directors elected with majority backing, regardless of being labeled 'independent,' are unlikely to offer meaningful dissent or oversight — defeating the very purpose of their designation.
Global best practices: where Pakistan falls short
Across jurisdictions, mechanisms like cumulative voting or slate-based minority representation are considered essential tools for equitable corporate governance. For example:
— The OECD Principles of Corporate Governance recognize cumulative voting as a legitimate and effective way to ensure minority shareholders have a voice in the boardroom.
— Italy and the UK have adopted dual-voting or slate-voting structures that guarantee at least one board seat to the non-controlling shareholders.
— Saudi Arabia and China require cumulative voting in listed companies to prevent entrenchment of control.
Pakistan's shift to a segmented voting framework moves away from these norms, replacing proportional representation with category-specific majoritarianism. In practical terms, this means the controlling shareholders not only dominate the board but now do so with the veneer of compliance and procedural legitimacy.
Recommendations: restoring balance and credibility
To preserve the integrity of corporate governance in Pakistan and re-empower minority shareholders, the following reforms should be considered:
Restore cumulative voting across a unified slate:
Reinstate the cumulative voting method as originally provided in the Companies Act, allowing shareholders to allocate votes freely among all candidates.
Introduce reserved minority representation:
Mandate at least one board seat to be filled exclusively through votes cast by non-controlling shareholders, ensuring true minority representation.
Enhance transparency through vote disclosure:
Require companies to disclose, in advance, the vote thresholds typically needed to win a seat under the new system. This would help shareholders make informed decisions and organize support.
Strengthen oversight and post-election review:
SECP should introduce a mandatory review of election results, including unopposed outcomes, to assess whether procedural reforms are delivering on their governance objectives.
Conclusion: a call to rebalance power
The intention behind SECP's 2023 amendment may have been noble—ensuring compliance with board diversity mandates. But in its current form, Regulation 7A disables one of the few levers minority shareholders have to assert their rights. The cumulative result is a system where even a shareholder with controlling 12.51% equity cannot credibly contest an election, and where the majority's grip on governance is quietly tightened.
Pakistan must not let formalism replace fairness. Regulatory reform must advance both diversity and equity. Otherwise, shareholder participation risks becoming an illusion—legally permitted, procedurally blocked, and practically futile.
It is time to revisit these reforms—not to abandon them—but to realign them with the foundational principles of transparency, inclusivity, and balance that underpin good governance worldwide.
Copyright Business Recorder, 2025

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