Can New Voting System Democratize Shareholders` Meetings?

An electronic voting system will be adopted as early as late next month to allow shareholders to exercise their voting rights through the Internet and without participating in general shareholders’ meetings.

Companies can use the system if their boards of directors agree. Those ending their fiscal year in June will begin using electronic voting under the supervision of Korea Securities Depository.

The new system is expected to empower minority shareholders by enabling them to cast absentee ballots online.

○ Digital certificate holders

A 35-year-old office worker in Daegu has never participated in the shareholders’ meetings of the companies he has invested in. He could not participate in the meetings since the meetings are held weekdays in Seoul. Last year, he tried to join the meetings by taking days off, but gave up after all three companies in which he holds shares held shareholders’ meetings on the same day. “I want to listen to management’s opinions and make my voice heard, but I cannot do that due to many restrictions,” he said.

The electronic voting system will lift such restrictions. If a shareholder has a computer with Internet access and a digital certificate, he or she can exercise his or her voting rights through the service. If a company posts items for its shareholder’s meeting, details on each item, and others on the Internet under a contract with the securities authority, its shareholders can cast their ballots online a day before the meeting. To access the voting system, a shareholder must use a digital certificate and confirm his or her identity. If shareholders finish casting their ballots, companies add up online and offline votes and post the results of the voting system on the Internet.

The introduction of the electronic voting system seeks to guarantee shareholders’ voting rights by eliminating time and space restrictions. Shareholders living in provincial areas cannot join shareholders’ meetings since most meetings have been held in Seoul (48 percent) and Gyeonggi Province (28 percent). Another restriction is that 62 percent of listed companies hold their shareholders’ meetings on the same day.

The new system will help scrap a “shadow voting” system or reduce its role, according to experts. Large shareholders have used the shadow voting system to make important decisions unilaterally, such as selecting inspectors. If a shareholders’ meeting fails to meet a quorum, the shadow voting system allows the company to ask the securities authority to exercise voting rights on behalf of the shareholders. The authority, however, exercises voting rights in a neutral way. The shadow voting system was introduced in 1991 to resolve the low participatory rate of shareholders, but has been exploited by majority shareholders.

Jeong Wan-yong, a law professor at Kyung Hee University in Seoul, said, “If the electronic voting system is utilized, companies can meet a quorum without shadow voting,” adding, “Japan has adopted a system enabling shareholders to exercise their rights via mobile phones. Given the increasing popularity of smartphones, electronic voting will be fully utilized soon.”

○ Electronic voting not mandatory for companies

Critics are skeptical of the full use of the system, however, since electronic voting is not mandatory. Large corporations, which have no problem in passing motions at shareholders’ meetings, could prove reluctant to introduce the system for fear of the rising voice of minority shareholders. Small and mid-size companies will also have problems in introducing the system due to the high cost. A source at a small company said, “I wonder how many minority shareholders will exercise their rights through electronic voting.”

Professor Jeong said, however, “Electronic voting will cut costs since companies don’t need to send materials to shareholders by mail or give gifts to shareholders at offline meetings,” adding, “To make the new system a success, minority shareholders must change their thinking of their rights.”

In the U.S., the electronic voting system reduced mailing costs by 490 million U.S. dollars in 2008.

ejin@donga.com redfoot@donga.com