One of the most contentious questions in the First CimplyFive Secretarial Practice Survey conducted in July 2016 was about the practice of obtaining the Director’s consent to hold the Board of Directors at shorter notice.
While this is not a legal requirement, our survey indicated that 81% of respondents revealed that they obtained directors’ consent to hold board meetings on shorter notice. Obtaining the consent of all participants, even if not mandatory, seems to be a desirable practice as it meets the basic criterion of good governance, which is to allow all eligible members to participate in the decision-making process. The moot question is, does closer scrutiny of this practice pass the test of good governance?
When we dig deeper, an unintended implication of this practice has the effect of giving a veto right to each and every director, as the failure of a single director to consent has the effect of adjourning the meeting of the Board, even if everyone else the director wants to have it.
In this context, it is worth noting an interesting point made by Robert’s Rules of Order, first published in 1876 and considered the bible of parliamentary procedure, on obtaining the consent of members. The available options are:
All members, or
All members present, or
All members present and voting.
The Book reasons that obtaining the consent of all members or all members present has the effect of treating an abstention vote, or the inability to vote for any reason, as a negative vote. Given this effect, this basis should not be used unless the matter is of such importance that the positive consent of all members is considered essential. Against this background, it is worth examining how and why the veto power arose, and whether it is an appropriate instrument for corporate board meetings.
Veto rights or negative affirmative rights are basically the denial of the power of the majority to make decisions. This is a right that is not normally granted in the statutes, that upholds the principles of democracy and supports decisions made by the majority. The rare exceptions in which the statutes deny majority rule are when the rights of a minority group are adversely affected or a basic tenet of their association is substantially modified, altered or changed.
In stark contrast, veto rights are a standard feature of private Shareholder Agreements that are used primarily by financial investors who take a stake in start-ups to protect the large financial outlay they bring. Cover areas of representation at the Board, approval of financing plans and CXO appointments, anti-dilution provisions and shareholder reward distribution mechanisms such as the right of first offer (ROFO), the right of first refusal (ROFR), the rights of escort and drag rights, veto rights have a logical and justified place, since in their absence it will be difficult for start-ups with ideas to attract capital, despite knowing that capital without entrepreneurs will remain idle cash. Therefore, for dreams to come true and idle money to become rich, the veto built into shareholder agreements is a valuable conduit.
In contrast to shareholder meetings where property rights must be protected, the Corporate Board is more of a body of collective wisdom to guide and manage the company, which includes some residual high-level powers involved in the day-to-day running of the company, as powers to borrow and supplement representatives to present the interest of the company. Given the nature of the Corporate Board, it is worth debating whether the Directors’ consent should be obtained to hold Board meetings on shorter notice.