What is Cumulative Voting?
The term “cumulative voting” refers to the multi-voting system that some organisations use to provide better representation to the shareholders, especially the minority shareholders. In cumulative voting, the shareholders hold voting rights equivalent to the product of the number of shares they own (assuming one vote per share) and the number of available director positions. In this type of voting, the shareholders can distribute their votes in whatever proportion they deem fit. In the US, some of the states mandate the use of cumulative voting in corporate governance. It is also known as multi-voting, weighted voting, and accumulation voting.
Purpose of Cumulative Voting
In general, the shareholders are required to vote on many critical matters of the company, which also include the selection of the members of the corporate board. Typically, the shareholders are entitled to one vote per share that they own at the time when a particular matter has come up for voting. Consequently, the minority shareholders tend to have limited say in the selection of the corporate board members in case of a straight voting method, while the majority shareholders have more votes owing to their higher shareholding, and thus their opinions get preference. However, many believe that this setup suppresses the opinion of the minority shareholders, which is considered to be 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, and in this way, he/ she can influence the outcome more meaningfully.
Most S&P 500 companies don’t employ the cumulative voting system. In fact, 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. Essentially, the system’s very purpose was considered the problem because it allowed the relatively small number of shareholders to elect the directors who the majority shareholders didn’t support.
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 either 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 a cumulative voting system provides more power to the minority shareholders.
Impact of Cumulative Voting
A cumulative voting system is advantageous to the minority shareholders and boosts their ability to influence the election outcome. Unlike straight voting, cumulative voting allows the shareholders to allocate all the votes to a single candidate. Let us see how minority shareholders benefit from cumulative voting. Say there is a minority shareholder who owns 15 shares in a company, and the majority shareholder owns the remaining 85 shares. If there is an election for four directors, the minority shareholder will get 60 votes, and the majority shareholder will get 340 votes – a total of 400 votes. In the case of straight voting, the minority shareholder can cast a maximum of 15 votes for his/ her favorite candidate, and this might not be enough for the candidate to be elected. In this case, the same minority shareholder can cast all the 60 votes for that single candidate and force the issue with more decisive power. The effect of the extra 45 votes on the final outcome captures the impact of cumulative voting.
Some of the major advantages are as follows:
- It is useful in empowering minority shareholders.
- Under this, several minority shareholders join forces to have a very good shot at electing their desired candidates.
- It helps in preventing the selection of the same type of candidates by the majority shareholders.
Some of the major disadvantages are as follows:
- This can lead to uncertainty within the organization.
- It is less useful in the absence of any proper communication channel in the organization.
- A small section of shareholders can work in cohorts to misuse the system and make it almost impossible to remove a director once elected.
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 either cast all their votes for one candidate or split the votes among the multiple candidates.
- Most S&P 500 companies don’t use the cumulative voting system for electing their board of directors.
So, it can be seen that organizations can use cumulative voting to protect the interest of minority shareholders in the selection of the board of directors. If the minority shareholders use the voting system effectively, they can have higher chances of electing their preferred candidate.
This is a guide to Cumulative Voting. Here we also discuss the definition, purpose, examples, and impact of Cumulative Voting along with its advantages and disadvantages. You may also have a look at the following articles to learn more –