scorecardresearch
Follow Us:
Wednesday, July 08, 2020

Minority shareholders must be protected but not at the cost of the majority

Should corporate democracy not offer clear rights to the majority shareholder (contained of course in not doing things that may be prejudicial or oppressive to the minority shareholders)?

Written by Janmejaya Sinha | Updated: December 24, 2019 10:25:37 am
In an era, when there is a lot of talk of good corporate governance and about the rights of minority shareholders, I want to ask what the rights of majority shareholders are.

I read your edit, ‘Reset the boardroom’ with some concern. You talk about the distinction between “decisiveness and arbitrariness” and “the growing distrust of corporates” to perhaps suggest that the actions taken by majority shareholders need to be contained. I am not a student of law and certainly don’t want to go into the merits of any specific judgment. However, I do want to express my confusion around the rights of a majority shareholder and orders which grant what is not sought by a plaintiff.

In an era, when there is a lot of talk of good corporate governance and about the rights of minority shareholders, I want to ask what the rights of majority shareholders are. What is the point of owning 51 per cent of a company if you cannot decide on who the chairman of the company is? Should corporate democracy not offer clear rights to the majority shareholder (contained of course in not doing things that may be prejudicial or oppressive to the minority shareholders)? Can the majority shareholders not remove a director? Do they need to discuss who a chairman of a company is with every minority shareholder in the name of corporate governance before taking a decision? How would the mechanics of such consultation work?

Further, can a board not appoint or remove a CEO? Around the world we see swift action. Most recently, the GE board suddenly removed its CEO without comment. In hindsight, we may even wonder whether the decision taken was a good one for the company. But the power to do so rests with the board. We can’t criticise the decision but it is not wrong. Rules allow for predictability in decision making. In fact, any business leader can tell you that every business decision that a company management takes will not be good ones, but in my view, that should not be taken as being prejudicial or oppressive to minority shareholders. What is oppressive and prejudicial to a minority shareholder is where, say, the management diverts funds out of the company. But a bad business decision cannot be seen as oppressive to minority shareholders, it happens in the course of business, all the time. Minority shareholders rights need to be protected from prejudicial actions of the majority for sure but we should be careful not to disturb the basic tenets of corporate democracy.

The other issue that to a layman is surprising is when relief that is not sought is given. If a plaintiff appeals wrongful termination by a company and goes to court seeking compensation for wrongful dismissal, is it ok for a court to order that the plaintiff is reinstated or should it order on the compensation sought? The plaintiff may not have sought reinstatement because he may believe the working conditions that he will get on return, maybe inimical. He wants to be compensated and have nothing to do with the company. Why should we believe the plaintiff does not know his or her own self-interest best? Does that not appear paternalistic?

Investors, domestic and foreign alike, seek predictability of law and a clear understanding of the rights of majority shareholders. Predictability in law is important in creating a business environment in which unforeseen and inefficient transaction costs to governance are not added. Otherwise there is too much uncertainty in conducting business. I truly hope this gets cleared very soon.

This article first appeared in the print edition on December 24, 2019 under the title “Boardroom basics.” The writer is chairman, Boston Consulting Group, India. Views are personal

📣 The Indian Express is now on Telegram. Click here to join our channel (@indianexpress) and stay updated with the latest headlines

For all the latest Opinion News, download Indian Express App.

0 Comment(s) *
* The moderation of comments is automated and not cleared manually by indianexpress.com.
Advertisement
Advertisement
Advertisement
Advertisement