What is Cumulative Voting?
The term “cumulative voting” refers to the multi-voting system that some organizations use better to represent the shareholders, especially the minority shareholders. Cumulative voting grants shareholders voting rights proportional to the multiplication of their share ownership (with one vote per share) and the number of director positions available.
This voting method allows shareholders to allocate their votes in any desired proportion. Several states in the US enforce the use of cumulative voting in corporate governance. It is also known as multi-voting, weighted voting, and accumulation voting.
Purpose of Cumulative Voting
Shareholders generally must vote on numerous crucial matters of the company, including the selection of corporate board members, and may even, in some cases, require an inspector of election services to ensure validity. Typically, shareholders have the right to cast one vote per share they own when a specific matter is up for voting. Consequently, the minority shareholders tend to have a limited say in selecting the corporate board members in case of a straight voting method. In contrast, the majority shareholders have more votes owing to their higher shareholding; thus, their opinions get preference. However, many people believe that this setup suppresses the opinion of minority shareholders, which is considered a problem, and this is where cumulative voting comes into play to save the day.
In this, the shareholders have votes that are equivalent to multiple times that of the straight voting system, which enhances the power of the minority shareholders such that they can influence the results of the election of board members. Basically, a shareholder can allocate multiple votes to a single candidate, so he/ she can influence the outcome more meaningfully.
Most S&P 500 companies don’t employ the cumulative voting system. Hewlett-Packard used the cumulative voting system in the past. But in 2016, Hewlett-Packard rejected the system stating that it is incompatible and conflicting with the majority vote standard for the election of directors. The system’s fundamental purpose posed a problem as it enabled a minority of shareholders to elect directors who lacked the support of the majority shareholders.
Example of Cumulative Voting
Let us assume that John is one of the minority shareholders of a company and has 100 shares. The company is currently having an election for five directors. Under the straight voting system, John can allocate a maximum of 100 votes for each candidate totaling 500 votes (100 votes for each of the five candidates). On the other hand, under the cumulative voting system, John can allocate a maximum of 500 votes to a single candidate or 250 each to two candidates or divide the votes whichever way he wants. Effectively, John can allocate five times the votes to a single candidate than what he can do in the case of a straight voting system. This is how it provides more power to the minority shareholders.
Impact of Cumulative Voting
Cumulative voting benefits minority shareholders and boosts their ability to influence the election outcome. Unlike straight voting, cumulative voting allows shareholders to allocate all their votes to a single candidate. Let’s examine how it benefits a minority shareholder who owns 15 shares in a company while the majority shareholder owns the remaining 85 shares. In an election for four directors, the minority shareholder will receive 60 votes, and the majority shareholder will obtain 340 votes, resulting in a total of 400 votes. In the case of straight voting, the minority shareholder can cast a maximum of 15 votes for their favorite candidate, which might not be sufficient for the candidate to be elected. However, through cumulative voting, the same minority shareholder can cast all 60 votes for a single candidate, exerting more decisive power and influencing the outcome significantly with the additional 45 votes.
Advantages
- It is useful in empowering minority shareholders.
- Under this, several minority shareholders join forces to have a good shot at electing their desired candidates.
- It helps prevent the majority shareholders’ selection of the same type of candidates.
Disadvantages
- This can lead to uncertainty within the organization.
- It is less useful without any proper communication channels in the organization.
- A small section of shareholders can work in cohorts to misuse the system, making removing a director once elected almost impossible.
Key Takeaways
Some of the key takeaways of the article are:
- It is used in the election of the board of directors.
- The entitlement of votes can be determined as the product of the number of shares owned and the number of directors to be elected.
- In cumulative voting, the shareholders can cast all their votes for one candidate or split the votes among multiple candidates.
- Most S&P 500 companies don’t use the cumulative voting system for electing their board of directors.
Conclusion
So, it can be seen that organizations can use cumulative voting to protect the interest of minority shareholders in selecting the board of directors. If the minority shareholders use the voting system effectively, they can have higher chances of electing their preferred candidate.
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