Straight and Cumulative Voting - Explained
Board Voting Procedure
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What is Straight Voting?
Under the straight voting scheme shareholders elect directors by a majority vote. Each share of stock has one vote.
Each share is entitled to vote for each member of the board being elected. Say, for example, that three board members are running for election.
A shareholder that holds ten shares will be able to vote ten times for each candidate. Basically, this works exactly like the political voting rules when electing governing officials.
The problem with this situation is that a shareholder that has a majority of the shares (or some combination of shareholders) will be able to elect every member of the board.
While this outcome may be intuitive, many shareholders will be reluctant to invest their money in a corporation (i.e., by buying shares) without some assurance that their interests will be represented on the board of directors.
The most common way of deviating from the straightforward model is through cumulative voting.
What is Cumulative Voting?
Cumulative voting combats the dominance of a majority shareholder in straight voting.
In cumulative voting a shareholder has a total number of votes equal to the # of shares x the # of director positions.
The shareholder can cast these votes all for one director position or spread them out.
Allowing the shareholder to concentrate his or her voting power often ensures that the shareholder will be able to elect or have a strong influence in electing that one director.
It is easy to see how this situation can reinforce minority shareholder rights to board representation.
While this seems very simply at first glance, arranging for cumulative voting what ensures a minority shareholder will be able to elect a board member is more difficult.
Luckily there is a simply mathematical formula that demonstrates exactly how many votes a shareholder will need in order to elect a director.
The reason that I say votes instead of shares is that some types of stock have no vote or more than one vote per share.
However, in the situation of common stock that has one vote per share, this calculation holds true.
The formula is: (S x X) / (D+1), where S = the number of shares voting in the election (i.e., total number of votes), X = number of directors you want to elect, D= number of directors up for election.
To elect the desired number of shareholders, you must have more than this number. Illustration:
So, if you have 500 shares voting in the election, 10 directors are up for election, and you want to elect 3 directors.
(500 x 3) / ((10+1) = 136.36, so you will need to own 137 shares to make certain that you can elect three of the ten directors.
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