Why Bangladesh Bank must consider
an alternative voting system

Share Shah

Insurance companies, life and general have ensured the participation of the stakeholders by electing shareholder-director or policyholder director which is required by law. After drumming up the collection of proxies from policy holders or shareholders they usually put there nominee who out votes other candidates. Unfortunately these individuals are rarely independent; often they are stooges, retired government and company executives. In general insurance companies the sponsor directors also hold shares from the public quota and thus able to ensure the success of their own nominees.
   The central bank's worry is not unfounded. If the election of depositor director is left to the commercial bank the outcome will be same as that existing in life insurance companies. Nominees of the existing board will prevail. Proxy votes would be easily collected by bank staff that has more resources than any other prospective depositor. This mistrust of the central bank has resulted in the present dilemma concerning how to ensure a fair election of competent depositor directors. Instead of current intervention which results in undemocratic practices, the central bank may ask private banks to short list competent depositors. Once this list is approved by the Bangladesh Bank, the relevant bank would leave it to the depositors to elect directors from the approved list thereby paving the way for corporate democracy.
   Under the typical voting system, the entire board of directors usually is only accountable to 51 per cent of the shareholders; the rest do not matter. It is the majority which decides who shall be elected. Although allowing a minority to hold one or two seats will not dramatically affect the board's decisions, but can instead increase accountability and allow other perspectives to be at least heard in the boardroom. Further change in order to infuse minority blood to balance the board of listed companies is now evolving in the Securities & Exchange Commission. The listed companies which do not want independent directors feel that a change of the pluralistic system to a cumulative voting method could lead to the election of incompetent directors or increase in commercial espionage. There is the general belief that small shareholders are noisy so would be their nominee. This is not altogether true because one often sees the presence of similar persons in annual general meetings without ever reckoning the reason of their agitation. This argument against any change in the voting system exists in our corporate clarity, which is elected with plurality voting power. Some fear that cumulative voting system would impair the homogeneity of the board by bringing about diverse views which would be inconsistent with company's objectives. Others fear that a change in the system may create factionalism and thus hinder a company's performance.
   A shareholder is entitled to cast one vote for each share of stock that he owns every time matters are brought before the stockholders meeting for a vote. Voting for the corporate board of directors is no exception to this rule. Unfortunately, this one vote system frequently puts shareholders with a small amount of stock, termed minority shareholders, at a great disadvantage. Since directors run for individual positions, minority shareholders are unable to exert necessary influence over any of the elections. Their small number of votes translates to a very small sphere of influence, and frequently minority shareholders are unable to elect directors who would care about the interests and priorities of minority shareholders. Often in a sheep's guise, executives of Investment Corporation of Bangladesh and other public sector financial institutions pretend to be saviours of the small investor. These executives take up board directorship because of their positions in their respective organizations and on the consolidated shareholding strength of the small investors who have invested in mutual funds, never on their own merit or proven operational business acumen. But everyone knows that these executives only represent their own private interest bounded to perks they can shake out of the company.
   By using an alternative electoral system-the cumulative voting system, the minority shareholders can have a greater input and involvement in the election process of the corporate board of directors. Cumulative voting gives minority shareholders the chance to be more fairly represented on the board of directors by allowing them to use all their voting power at one time. Historically, the use of cumulative voting for the election of corporate board of directors originated because of abuses of power by the corporate directors of large Railroad Corporation in the USA.
   In a cumulative voting system, the number of votes available to a shareholder in any given election is equal to the number of shares held by the shareholder times the number of positions up for vote. All positions are voted on at the same time, and the person with the highest amount of votes wins the election. The key difference between cumulative voting and plurality voting is that these votes may be voted in any possible combination and may all be cast for the same director. For example, if shareholders in an Annual General Meeting are asked to fill the position of five directors, each share would be entitled to five votes, which could all, be cast for the same candidate. It is important to consider that cumulative voting should only be used to elect the board of directors, and must not be applicable for votes on other resolutions of the company. The Companies Law does not specify a specific voting system as such any system depends on the internal regulation of the company.
   The outcome of cumulative voting is that the minority shareholders' that have invested in shares through public offerings are able to gain some representation on the board of directors of a listed company and thus, at least can have some say in its management. In many cases, this enables shareholders to elect a nominee that has similar interests and priorities. This is accomplished by lowering the threshold needed to win a single seat of the board. However, cumulative voting should not impact majority rule or create a stalemate, as it preserves the right of the majority shareholders to control the company.
   If a company that does not use the cumulative voting system, the number of candidates running for the directorship positions is frequently equal to the number of positions to be filled, thus giving no alternatives to shareholders or purpose to the entire election process. In other instances, the shareholders may be forced to vote for or against an entire list of nominees, leaving no opportunity for individual preferences. In fact, cumulative voting should help reduce the existence of special interest factionalism, giving minority shareholders a stronger voice in the governance of the corporation.
   The government has already undertaken several legal changes in respect of the boards of directors of banking companies, which has been strongly repudiated by bank promoters association. In any case these changes may not bring in the beneficial returns to the banking industry and in the bank's board, if the gambit of plurality voting persists. Vested groups could form caucuses and put in their front man thereby defeating and manipulating the very ethics and purpose of the law. The other fallout of this change would be the reinforced efforts by individual quarters to collect proxy votes from smaller investors. The regulators must consider a demotic approach in framing a regulation in this respect in order to restrict further abuse of small shareholders.

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Riots erupt as food prices soar

Martin Khor

Almost all of a sudden comes the news of food-related riots in many parts of the developing world, due to the rise in prices of staple foods like rice and wheat and shortages in the market.
   The food crisis is now rivalling the financial crisis and climate change as the most important problem the world has to solve.
   It is the most pressing, because people cannot go a few days without food, and because hungry people are showing their anger and desperation on the streets.
   Last week, Haiti's capital was paralysed as demonstrators tried to storm the Presidential Palace due to rising prices of rice, beans and oil, and five died from the unrest. There were also two days of rioting in Egypt, over the doubling of food prices in a year.
   
   Forty killed in Cameroon
   Riots linked to inflation killed 40 in Cameroon in February. There have also been protests in Indonesia, the Philippines, the Ivory Coast, Mozambique, Senegal, Bolivia, Ethiopia and Madagascar.
   In Thailand and Pakistan, army troops were used to prevent the seizure of food from fields and warehouses. Suddenly, many top United Nations officials are warning that rising food prices are causing public unrest and threatening political security. In Asia, shortages and rising prices of rice are most worrisome. Ironically, there was a shortage of rice even in Bangkok, due to hoarding, although Thailand is the world's top rice exporter.
   There are reports of Vietnam and India taking measures to restrict rice exports to ensure local supplies. African countries that import from Thailand are asking it to guarantee that it will meet its export commitments. The Philippines, the world's top rice importer, vowed last week to be self sufficient in production by 2010. Its agriculture minister called for a meeting of Asian Ministers to discuss the food crisis.
   Last week, Malaysia's Agriculture Minister Datuk Mustapa Mohamed said an extra RM$6 billion allocation is needed to boost rice production. The target is to boost self-sufficiency from 70 per cent to 90 per cent. Last month he said that slashing the country's food import deficit is one of his first tasks.
   The figures for food prices are sobering, even staggering. On April 9 the price of Thai medium quality rice traded for a record $854 a tonne, more than double the level at the end of last year. Average rice prices will rise further in 2009 and 2010, the World Bank predicts.
   The rise in rice prices is due to a boom in consumption in Asia, the Middle East and West Africa, a reduction in the acreage of rice, rising fuel and fertiliser costs and the exhaustion of technological advances, according to an article in the Financial Times.
   Other factors slowing production are water shortages in South-East Asia, Central America and West Africa, and higher labour costs in countries like Vietnam. Demand has exceeded supply in six of the last eight years and global rice stocks at their lowest level since 1976, said the Financial Times.
   According to the UN Food and Agricultural Organisation, cereal prices continued to rise in the past two months. Prices of rice increased the most after export restrictions by major exporting countries. By the end of March, prices of rice and wheat were about double their levels a year earlier, and maize prices were over a third higher. The import bill for cereals for the world's poorest countries will rise by 56 per cent in 2007/08, after a 37 per cent increase in 2006/07, said the FAO. World cereal stocks are expected to fall to a 25-year low of 405 million tonnes in 2007/08, down 21 million tones or 5 per cent from the previous year.
   
   Five major factors
   Five major factors are widely cited for the rise in food prices:
   1.The rapid rise in oil and energy prices, which has increased the costs of fertiliser, operating of machinery, harvesting, storage, delivery of food;
   2.The increased demand for food resulting from high economic growth in countries like China and India, which also caused a change in diet towards more meat;
   3.Weather-related events, such as drought in Australia, leading to bad harvests;
   4.The shift from growing crops for food to crops for biofuels, which not only reduces food supplies but also leads to market speculation and the rise of prices; and,
   5.Reduced investments in agriculture worldwide in recent years, causing production to be outstripped by the rising demand.
   This combination of factors means that the food price rises are not expected to be a temporary phenomenon (which would be the case for instance if they were caused mainly by drought in one or two years).
   
   Biofuels
   The FAO director-general Jacques Diouf said in New Delhi last week that food shortages were a structural problem and the solution needs to be structural. The high prices would not ease in the short term due to the supply-demand situation. He blamed wrong policies of the past two decades for the crisis.
   Of the various factors, the one attracting most attention and criticism has been the rapid rise of production of crops for biofuels, which is diverting away from the use of the same crops for food. The New York Times in an editorial on the world food crisis on April 10 blamed the rich world for exacerbating the crisis by supporting the production of biofuels. It quoted IMF (International Monetary Fund) estimates that corn ethanol production in the US accounted for at least half the rise in world corn demand in each of the past three years. This elevated corn prices; feed prices rose; and so did prices of other crops (mainly soybeans) as farmers switched their fields to corn.
   The US provides a subsidy of 51 cents a gallon to ethanol blenders and imposes a tariff of 54 cents a gallon on imports, while most European countries exempt 'biofuels' from some gas taxes and impose a tariff equal to over 70 cents a gallon of imported ethanol. The New York Times called for an end to these government interventions, as corn ethanol does not help in reducing greenhouse gas emissions, while it adds to rising food prices.
   The FAO head Jacques Diouf, who is critical of the switch of land use to biofuels, meanwhile said (without naming the US) that currently 100 million tonnes of cereal are being diverted for biofuel production in one country and the quantity is estimated to rise 12-fold by 2017.
   He said the FAO is calling an emergency meeting of heads of states on June 3-5 to discuss the overall food situation, including the impact of climate change.
   - Third World Network Features

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