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Institutional EYE

Commentary on Corporate Governance Issues

By Invitation Some examples of countries where minority shareholders can elect independent directors

[endif]--The OECD’s “Owners of the World’s Listed Companies”, published in 2019, provides a detailed breakdown of the shareholder composition of almost 10,000 companies representing 90% of the global market capitalization. The overall picture it paints is of concentrated ownership in most developed, emerging and frontier markets – “Ownership concentration at the company level is commonly observed across markets (Exhibit 1). In half of the world’s publicly listed companies the three largest shareholders hold 50% of the capital and in three-quarters of the companies do the three largest owners hold more than 30% of the capital. In most markets, private corporations or strategic individuals appear as the largest shareholders in individual companies.”

The potential for misalignment between dominant and minority shareholders is reflected in an impressive array of legal and regulatory mechanisms across jurisdictions intended (with varied degrees of success) to provide the latter with some means to check behavior by the company that disproportionately benefit controllers. Such measures include, but are by no means limited to ex-ante requirements for independent director or supermajority or majority-of-the-minority approval of certain types of transactions (especially those where the controlling shareholders may have a conflict of interest) and expost means of redress, for example suits under US law for violation of controlling shareholders’ fiduciary duty to the company or UK company law actions alleging “unfair prejudice”.

Most ex ante approaches presuppose some significant component of the Board of Directors that is independent of the dominant shareholders. Director independence is typically defined through criteria that indicate that directors are free from personal, financial, and other relationships with controllers that would compromise their duty to act in the best interests of all shareholders. Despite the reliance on independent directors to look out for the interests of minority shareholders, most legal frameworks do not mandate that independent directors on the Board of public companies be directly elected by the minority shareholders themselves.

While far from a majority approach, there are a number of jurisdictions that do provide, in one way or another, for the effective selection of independent directors by minority shareholders. What follows are some examples, including a table from OECD’s 2019 Corporate Governance Factbook, of jurisdictions that have made forays in this area (Appendix A). The list of jurisdictions below should not be considered definitive. Nor do we proffer any judgments about the effectiveness of the various approaches. But what follows should provide some indication of the possible variations around this theme.


In October 2001, Brazil introduced Law n. 10.303, which built upon the Corporations Law (Brazilian Companies Law 6.404 of 1976) to include rights for minority shareholders to elect independent directors.

Under the updated Corporations Law, the OECD notes, “shareholders with an aggregate 5 -10% (depending on the size of the company—the higher the capital base, the lower the percentage threshold to request cumulative voting) or more of the voting share capital have the option of requesting the adoption of a cumulative voting process to elect the members of the Board.”

The Corporations Law also entitles minority shareholders to elect one member of the Board and his/her alternate through a separate election. To do so, shareholders must own 15% or more of the voting stock, or own preferred shares without or with restricted voting rights worth at least 10% of the share capital. If neither class of shareholders can meet its individual 15% or 10% threshold, the two classes may group their shares together to reach 10% (so long as they have “continuously held their shares for at least three months prior to the general meeting”).

The above-mentioned provisions were little used until Brazil’s securities regulator (Comissão de ValoresMobiliários - CVM) issued Instruction 481 in 2009 that, inter alia, requires companies to formally broadcast as an announcement to the market shareholder director nominations (through the “Oficio Circular”, an annual letter with suggestions and interpretations). This essentially provides minority shareholders with access to the company’s proxy.

Subsequently, the CVM approved a distance voting system under Instruction 561 of 2015, which specifies the period before the meeting to receive nominations. The distance voting system suffered significant growing pains in the first few years but today facilitates the exercise of the minority shareholder rights described above.


Chile’s Corporate Governance law approved in 2009 (Law n. 20.382) specifies the definition of independent directors and criteria for how they must be elected. Directors in Chile are not considered “independent” unless they have been elected with the approval of minority shareholders.

Prior to 2009, independent directors were defined as those elected exclusively by minority shareholders through cumulative voting practices; controlling shareholders did not participate in electing independent directors. The 2009 law ended this requirement and established “additional detailed economic and relational criteria to determine the eligibility of candidates to be designated as independent.” For instance, “a person cannot be an independent director when there has been, over the previous 18 months, a series of links with the company including economic, professional, credit or commercial dependency, as well as any kinship relationship.”Although independent directors now do not need to be exclusively elected by minority shareholders, non-controlling shareholders’ rights are protected by Law 18045 (1981) which designates that any shareholder or group of shareholders that together control 10% or more of a company has the right to elect a director.

In practice, however, controlling shareholders frequently find themselves asking minority shareholders to nominate a director. Article 146 of Chile’s Companies Act (Ley deSociedadesAnónimas, Law 18.046) determines when a director is considered to have an interest in a transaction for the purpose of applying the procedure to approve related party/affiliated transactions regulated in article 146 of the same law. The provision is contained in the third paragraph of article 44 of the Law and states a presumption that a director has an interest in a transaction involving the controlling shareholder (and or its affiliates-/related parties) if the director would not have been elected without the votes of the controlling shareholder (and/or affiliates/related parties of the controlling shareholder).

Chilean companies “must elect at least one independent director to their board using a plurality voting system.”In practice, the independent director is often nominated by the controlling shareholder if minority shareholders do not coordinate.


Director elections in Italy employ the Voto di Lista mechanism, akin to slate elections. Pursuant to Article 147-ter of Italy’s Consolidated Law on Financial Intermediation, at least one member of the Board of Directors of public companies must be elected from the minority shareholder-nominated slate of directors that obtains the largest number of votes.Rules issued by Consob, Italy’s securities regulator, apply the same principal to election of members of the statutory audit board (“collegiosindacale”) of public companies. According to the Voto di Lista mechanism, issuers must publish the lists of directors nominated by the company’s Board and those nominated by one or more groups of minority shareholders 21 days prior to the meeting.

Italy’s association of asset managers, Assogestioni – associazone del risparmiogestito,has played a key role in recent years in raising consciousness among institutional investors of their rights under the Voto di Lista mechanism and in making election of directors by minority shareholders a permanent fixture of Italian corporate governance.


Mexican Securities Market Law provides minority shareholders that in the aggregate represent 10% of voting and limited voting shares the right to appoint a board member.The 10% threshold was initially enacted when Mexican company law provided for Boards to be composed of eleven members and so amounted to something commensurate with cumulative voting.

In practice, however, the charters of most listed Mexican firms now include charter provisions that require Board approval for any shareholder to hold or vote more than a certain percentage of shares, with this threshold always below 10% and frequently lower.These charter provisions in effect empower controllers to keep off the Board the nominees of any but the most determined groups of minority shareholders. Their legality has been challenged, with investors petitioning the Mexican securities regulator (Comisión Nacional Bancaria y de Valores – CNBV) and the Mexican Stock Exchange to require listed companies to delete them. So far, neither the CNBV nor the Exchange has ruled on such petitions.


The Swedish Code of Corporate Governance, while not formally part of Nasdaq Stockholm’s rules and therefore not legally binding, set out recommendations of best practices. The Code was updated in November 2015 and ensures minority shareholder rights to elect at least two independent directors.

At least two of the directors who are independent of the company and its management must also be independent of the company’s major shareholders. “Major shareholders” are shareholders directly or indirectly controlling 10% or more of the shares or votes in the company.The nomination committee’s nominations for the chair and other directors are to be presented in the AGM notice (at least four weeks prior to the AGM) and on the company’s website. At the AGM any shareholder may make new proposals regarding the number of directors and the remuneration thereof.

The Swedish Code of Corporate Governance recommends that Swedish companies establish a nomination committee. This committee should have at least three members, which in practice tend to represent major shareholders.The Code specifies, “At least one member is to be independent of the company’s largest shareholder, in terms of votes or any group of shareholders who act in concert in the governance of the company.” Two additional provisions protect minority shareholder influence on nominations: members of the Board of Directors may not constitute a majority of the nominations committee, and no more than one Director representing a major shareholder may be on the nominations committee.


Turkey’s company law allows, but does not require, a listed company’s articles of association to provide shareholders who (together with related parties) own less than 5% of the company’s stock the right to elect one or more directors to the Board. Such provisions must limit the percentage of the Board elected by such shareholders to no more than half its members. Thedirectors elected through this mechanism may be elected by individual minority shareholders or collectively, provided again that none of the shareholder participating in such election controls more than 5% of the total shares (together with any related parties).

The author wishes to thank Julia Hermann, Senior Strategy Analyst atCartica Management, for her comments.

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