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Chapter 2 - Proportional voting for Directors
On 24 June 1998 during the committee stage of
debate on the Company Law Review Bill 1997 Senator Murray moved that the
following provisions be added:
Division 9 – Election of directors
250U Application of this Division
- This Division applies
to companies which become listed corporations after the commencement of this
- All other listed
- at least 2 weeks
but no more than 4 weeks before the next annual general meeting held after the
commencement of this section, or at the second annual general meeting after
commencement if there is insufficient time between commencement and the next
annual general meeting, circulate a summary of the method of electing directors
which is described in this Division, together with the opinion of its directors
on matters relevant to the application of this method to the company; and
- propose a resolution
at the next or second annual general meeting held after the commencement of
this section (as the case may be), that the company elects that this Division
apply to it.
- Any resolution of a
listed corporation which would result in this Division no longer applying to
the company is invalid.
- Nothing in this
Division requires a company which was a listed corporation at the commencement
of this section to propose a resolution at any annual general meeting held
after the commencement of this section, that this Division apply to the
company, if the resolution under paragraph (2)(b) is defeated.
250V Directors to be elected annually
- All directorships of a
company become vacant at the annual general meeting of that company.
- The time at which
directorships become vacant is immediately before the meeting proceeds to elect
- Unless precluded by
the company’s constitution, a person who has previously held a directorship of
the company may nominate for re-election.
250W Process of election
- The election of
directors must be conducted by a poll.
- Each member of the
company is entitled to the number of votes calculated using the following
V x S
V is the number of directorship
S is the number of shares held by
- Members may cast their
votes as they think fit in favour of any number of the nominees for
directorships and members need not cast all of their votes.
The Senate did not agree to the amendment. The
Government subsequently confirmed that it opposed the amendment and referred
the matter to the PJSC for inquiry.
The PJSC received 38 submissions which addressed
this topic, of which 8 were in favour and 30 opposed.
Arguments against proportional representation for directors
The need for a united board
Many submissions advised that a system of
proportional representation would prejudice essential board unity. Porter
Western Limited submitted that a minority interest on the board could exercise
a disproportionate interest, with small factions not operating in the interest
of the company. Companies require decisive governance which the present system
has delivered. Arnold Bloch Leibler submitted that a company needed a cohesive
and in many cases a strong board. There should be vigorous debate at the board
level about the primary object of the company, making money for its
shareholders, not power plays between groups of directors. These power plays
should be fought and lost on the floor of the general meeting and not
perpetuated, which is a problem with proportional representation. A relatively
small lobby group could appoint a nominee to the board, which could lead to
division. The Corporations Law should not perpetuate minority positions within
The Australian Stock Exchange Ltd (ASX) and the
Association of Mining and Exploration Companies separately submitted that
directors have a duty to act in good faith for the benefit of the company as a
whole, not particular interest groups. The Australian Institute of Company
Directors (AICD) submitted that one or more groups or factions may promote
disharmony or disagreement on a board, where collective decision making and
cohesion are so important. A fractious board is detrimental to the company. A
board should be united in policy and outlook. The Investment and Financial
Services Association Ltd (IFSA) submitted that directors are there to represent
the interests of all shareholders. The risk is that the board will not be truly
unified. Factions would prevent the board from providing a clear strategic
environment for management. The Australian Shareholders Association (ASA)
submitted that a board should be a group of people with diverse skills who can
work together as a team in the interests of all shareholders, not represent
different interest groups. Mr L Factor submitted that minority representation
could be disruptive and destructive of the team spirit. There could be a
conflict situation with dissident directors perhaps publicly challenging in the
press actions of the company.
The nature of elections for
Mr R I Barrett submitted that it was entirely
ill conceived to compare elections for directors to elections for the Senate.
For instance, there is no presumption that every position on a board of
directors should be filled. Members may decide how many directors there should
be (if necessary, by amending the constitution), may remove directors, elect new
ones and increase or reduce the number of available seats. They may choose to
leave available seats vacant. The question is always whether A should be
elected, not who out of A, B and C should fill a particular vacancy. The AICD
submitted that the objective was to appoint the best-qualified directors, not
representatives of an interest group. The ASA submitted that elections for
directors should not be confused with elections for members of parliament.
Self-government for companies
A number of submissions advised that the method
of electing directors should be decided by the company itself, not by the
Corporations Law. Mr R I Barrett submitted that the choice among any particular
methods of election is in the first instance a matter for the chairman and ultimately
for the meeting itself. The Corporations Law should not make one voting method
compulsory but should re-affirm the chairman’s explicit duty to conduct any
election in a manner which ascertains the true will of the members who vote. Mr
I Cochrane submitted that there was no logic or reason why the decision to
elect a director should be treated in any way differently from any other
decision of a general meeting. Mr John Wilkin submitted that shareholders
should choose the method of voting, so long as each ordinary share has a vote
and the vote is for each director individually. Particular methods of voting
should not be provided by law. Ernst and Young submitted that the members may
amend the constitution if they prefer another method of election.
KPMG submitted that voting systems should be the
subject of agreement between the company and its members. The AICD submitted
that this matter was inappropriate for legislation; it was best left to the
company itself. An individual company could trial proportional representation,
but it was totally inappropriate and contrary to the interests of the
Australian economy for legislation to impose such a model. The ASA submitted
that if any company wants proportional representation then it is free to adopt
it, but that this should not be imposed. Coles Myer submitted that any matter
relating to shareholders should be put to the shareholders to decide.
Proportional voting is impractical and
A considerable number of submissions advised
that proportional voting was impractical and counter-productive.
The Australian Society of Certified Practising
Accountants, the Institute of Chartered Accountants in Australia and the
Chartered Institute of Company Secretaries (W.A.) submitted that in most cases
the number of directors to be elected would be few and the result would be no
different from other methods. Even where there is a contested spill it would
not be suitable. The ASA submitted that the quality of a board depends more on
the selection process of a nomination committee by which vacancies are filled
rather than an election process. Blakiston and Crabb submitted that instead of
a rigid system of proportional representation that it would be better to have a
requirement for independent directors. The IFSA submitted that the proposal
would have the opposite effect to more democracy in a company.
Arnold Bloch Leibler submitted that the proposal
applied only to new companies and there would be problems with two sets of laws
operating. The AICD asked why should existing companies be able to avoid the
proposed requirement while new companies are locked into it.
Bristile Ltd submitted that the proposal was
unnecessarily complicated and would extend the time for voting. Ernst and Young
also submitted that delays could occur.
The Law Society of W.A. submitted that the
proposal would not achieve the desired result and may be counter-productive.
Siddons Ramset opposed the proposal because of complexity and cost and because
it was unlikely to change any outcomes. Coles Myer Ltd submitted that for a
large company the costs of proportional representation would be great.
Boral submitted that the proposal was
impractical; the Chartered Institute of Company Secretaries saw no reason for
it; Ernst and Young submitted that there were no perceived benefits; and the
Permanent Trustee Co Ltd opposed it because it added no value to the present
Adverse effect on the principle of
election by absolute majority
A number of submissions advised that
proportional representation would breach the principles of one vote, one value,
and of an absolute majority for each successful candidate. Allen Allen and
Hemsley submitted that the traditional system of electing directors by separate
resolutions with respect to each candidate had certain limitations and may not
operate fairly when the number of candidates exceeds the number of vacancies.
However, the traditional method ensures that each director receives an absolute
majority of members voting at a general meeting. This principle of an absolute
majority should be maintained, with the problem addressed by separate votes for
each candidate with those receiving the highest absolute majorities elected.
Arnold Bloch Leibler submitted that the proposal attacked the principle of
majority decision making.
The ISFA strongly opposed the proposal because
it conflicted with the principle of one vote, one value. Mr Peter Jooste QC
submitted that the entire listing mechanisms on the ASX rely on one share, one
vote. The ASA submitted that it supported one share, one vote.
Directors should be representative of
those with the largest financial interest in the company
A number of submissions suggested that directors
should reflect the choice of those shareholders who have the greatest financial
interest in the company. Suncorp-Metway Ltd submitted that the present
situation was satisfactory because it recognises those with the largest
financial stake in the company. Bristiles Ltd submitted that a simple majority
vote for each director individually better reflects the wishes of the
shareholders who have most at stake in the company. The Australian Stock
Exchange Ltd submitted that voting should reflect shareholders’ economic
Arnold Bloch Leibler submitted that while those
with only a 35% interest may be able to control the company, that 35% may be a
huge investment. The Australian Listed Companies Association Inc submitted that
a member with 35% of the shares should be able to put a director on or off;
this was better than a member with 5% being able to do that. Elections for
directors are not political elections. He who pays the piper calls the tune and
the largest shareholder must be allowed to call the tune.
More publicity and education could
remedy any deficiencies
A number of submissions advised that any
perceived problems could be solved by the ASX and ASIC encouraging companies to
adopt best practice or to consider the options for a change in voting systems.
Mr Peter Jooste QC submitted that the ASX Listing Rules could provide for
companies to consider this when reviewing their constitutions. Mr Laurie Factor
submitted that improvements could be made over time with education. There could
be better information and design of the voting process in terms of existing
Investor confidence and adverse
A number of submissions advised that the
proposal would have an adverse effect on investors and on company performance.
Arnold Bloch Leibler submitted that any requirement for directors to be elected
annually could lead to a focus on short term profits rather than on long term
growth. Also it does not accord with international best practice, which is to
move away from different classes of voting stock. The IFSA suggested that any
change to one vote, one value, would affect the integrity of Australian capital
markets. Freehill Hollingdale and Page submitted that the prime objective of a
company is the creation of wealth for its shareholders by the profitable
undertaking of business operations. This is done by efficient operation, which
must extend to the board, which is responsible for setting the strategic
direction of the company. The present practice is that it is unusual for a
majority of directors to be up for election at once. Any change to this would
lower the degree of control a majority shareholder would have over which
directors are elected. It is essential for continuity of the underlying
business that changes be progressive, to avoid the costs of loss of
institutional knowledge and to ensure stability of duration for the company. A
change would be a disincentive for potential directors. The business community
perceives that directors’ duties are onerous and in these circumstances
qualified directors may decline to serve. If shareholders are dissatisfied with
the strategic direction of the company they can leave through the marketplace.
There are also statutory remedies for mismanagement. Ernst and Young submitted
that there were no serious requests for change to the election of directors
from the business community.
The ASX submitted that it was strongly opposed
to annual election of all directors by proportional representation, with
irrevocable shareholder approval for existing listed entities. This could
result in business continuity problems, with boards concentrating on short term
rather than long term performance. The Listing Rules provide for rotation of
directors on a three-year basis, which is an appropriate balance. The AICD
submitted that minorities have sufficient safeguards. The Corporations Law and
the Listing Rules require companies to publish a variety of information.
Minorities may requisition a general meeting and have a remedy in case of
oppression. Also the proposal could debase the value of existing shares,
particularly where investment decisions have been based on the one share, one
vote principle. The proposal would make it difficult if not impossible to
attract and retain good quality directors. It requires a reasonable length of
tenure to make a worthwhile contribution. Mr Peter Jooste QC submitted that
proportional voting may confuse international investors, inhibit the raising of
capital and could distort the market for control, which historically has shown
a premium for vendor shareholders.
The Law Society of Western Australia submitted
that in all cases shareholders should approve any change and that it should not
be irrevocable. The three-year rotation provided by the Listing Rules is
adequate. The proposal could result in a short term focus and affect
continuity. Coles Myer Ltd submitted that checks and balances were adequate,
where in its own experience institutional shareholders combined to implement a
change in the composition of the board. There is an economic and investment
value attached to one share, one vote and proportional representation has the
potential to raise that as an issue. Also, 100 shareholders now could take the
question of voting to a company meeting, so there is no need for compulsion.
Freehill Hollingdale and Page submitted that dissatisfied minorities should
exit the company. The Corporations Law should not perpetuate minority positions
inside the company. Lack of diversity will not be affected by proportional
representation. The basic question is whether directors are doing a good job.
Blakiston and Crabb submitted that it was rare
for there not to be independent directors on a board. It would not be possible
to promote a company in the market place if it simply comprised nominees of one
shareholder. Mr John Fast submitted that proportional representation would only
work with annual elections and that would be wasteful and deliberating for a
company. Companies do not work on a year to year basis; strategic plans are
much longer than this.
Arguments in favour of proportional representation for directors
Unfair procedures when candidates
A number of submissions suggested that common
voting procedures operated unfairly where there were more candidates than
vacancies. Mr Nick Renton submitted that a method of voting commonly used is
particularly undemocratic in these circumstances. For instance, if there are,
say, six vacancies and eight candidates the first six are elected one by one on
a majority vote and the chairman of the meeting after the sixth resolution says
that no more resolutions can be put. Mr Timothy Walshaw submitted that the
result of this is that boards are hardly elected at all; they are
self-appointed. The CPA/ICA/CICS (W.A.) submitted that the system is
self-perpetuating, because the board recommends their successors or
replacements. Mr R I Barrett submitted that such a system, without a further
resolution in relation to the remaining candidates, would not withstand legal
Proportional representation is
fairer for minority interests
A number of submissions suggested that
proportional representation would be fairer to the interests of minority
shareholders. The Australian Law Reform Commission submitted that it was
strongly in favour of mechanisms to enable minorities to be heard, but suitable
safeguards against abuse would be crucial. Mr Nick Renton submitted that votes
for directors should be based on the same system as Senate elections. This
would ensure that small groups with common interests as well as large groups
would be able as of right to obtain board seats on the basis of their holdings
if they wished. These groups could be:
- shareholders with a common philosophy;
- shareholders with a common interest, such as age pensioners;
- clients of the broker who organised the float;
- investors in one geographic location;
- former shareholders in a company taken over who want some
- unconnected shareholders who just want to see new blood on the
There is the scope for
misuse, because it could be used for purposes other than to advance the
interests of the company. However, directors may not vote on a matter in which
they have a conflict of interest. It would be essential to have reasonable size
quotas. Ballot papers would be required and although this would take time it
would be fairer. Also voting could take place ahead of the general meeting with
the result announced at the meeting. Proportional representation should be the
default mechanism if the replaceable rule is used; if it is left to the board
then in a practical sense the shareholders will never get to vote on it. It
would still be possible to have three-year elections. The CPA/ICA supported
proportional voting similar to Parliament, but as a replaceable rule.
Mr Timothy Walshaw submitted that proportional
voting by postal ballot would provide direct representation of shareholders in
proportion to their interests, but strictly on the basis of one share one vote.
The Australian Employee Ownership Association (AEOA) submitted that
proportional representation would not only reflect the proportional interests
of shareholders, but also guarantee minority interests such as employee
shareholders, who can’t exit the company easily.
Mr Shann Turnbull submitted that proportional
representation would replace the less efficient and less effective stock market
for corporate control with a far less expensive, but much more discriminating,
sensitive and equitable internal voting market. Cumulative voting is
preferred, with one share getting one vote for each vacancy, with the ability
to distribute the votes between candidates as the shareholder wished. For
instance, all votes could be cast for one candidate. The present position is a
dictatorship. Companies need a loyal opposition. The Corporate Directors
Association and the AEOA supported Mr Turnbull. Mr Nick Renton submitted that
cumulative voting is unrefined proportional voting, because preferences are not
marked and votes are not transferable.
Mr Neil Fisher of the Grains Council of
Australia advised the Committee that the constitution of the privatised AWB Ltd
provides for proportional voting for directors according to commercial
interests. New South Wales and Western Australia, the largest producers, can
elect more directors than say Victoria or Tasmania. There is also proportional
voting on a regional basis.
The PJSC concluded that the Corporations Law
should not provide expressly for proportional representation of directors. In
particular, it should not provide for election of directors by cumulative
The weight of evidence was clearly in favour of
the present situation, where companies themselves decide on the form of
election. The members of a company may decide if they wish to adopt any form of
proportional representation, including cumulative voting, but there should be
no compulsion in the Corporations Law for members to vote on a particular
system. It is also inappropriate to provide for members to make an irrevocable
decision. There are relatively simple procedures for members themselves to
require a company to decide on a particular voting system at a general meeting.
These procedures should be used if a group of shareholders feels that a company
should adopt a particular form of proportional representation.
The PJSC concluded that proportional
representation had the potential to affect the essential unity and cohesion of
a board, with the possibility of factions and dissidents. Directors must act in
good faith for the benefit of the company as a whole and the existence of
minority interests would inhibit this.
The PJSC also largely accepted the submissions
which argued that elections for directors were not comparable to those for
parliamentarians, that proportional voting could be impractical and
counter-productive, that it would strike at the principle of election by
absolute majority of members voting, that directors should be generally
representative of those with the greatest financial interest in the company and
that proportional representation may affect consumer confidence and have
adverse economic effects.
The PJSC accepted that proportional
representation would increase minority representation on boards, but as noted
above, concluded that its mandatory or irrevocable introduction would have
disadvantages which easily outweighed any benefits.
The PJSC accepted that there was a perception of
unfairness when members voted one by one for directors in cases where there
were more candidates than vacancies. However, this problem could of course be
addressed by any suitable voting system, not necessarily proportional or
The PJSC sees considerable merit in the ASX and
ASIC encouraging education and publicity campaigns with the object of making
companies aware of the different voting procedures which are available and
which may be suitable for the individual circumstances of the company. This
could be a matter for consideration when companies are revising their
constitutions. Also companies should be encouraged to adopt best practice in
relation to the voting design and process in relation to their existing
The PJSC recommends that the Corporations Law
makes no provision mandating the adoption of any form of proportional voting
for directors or requiring a company to put any such proposal to its members.
The PJSC recommends that the ASX and ASIC
broadly review company voting procedures with a view to encouraging best
practice in relation to voting design and process. This review could take the
form of advising on a number of options for voting procedures, with indications
of the advantages and disadvantages of each.
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