What is Cumulative Voting? Explained With a Simple Example
May 10, 2019
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Cumulative voting is a system that helps voters vote for one or more candidates through several votes. Read on to know more about the concept of cumulative voting.
Fast Fact: Some states in the U.S. have legalized cumulative voting in the corporate sector. More than fifty communities in the U.S. reportedly use this voting strategy.
Ordinarily, the hierarchy of a public company begins with the board of directors. The CEO (Chief Executive Officer) or the Chairman/President of the company follows next. Beyond this, we have the other corporate officers - CFO (Chief Financial Officer), COO (Chief Operating Officer), etc.
The higher management personnel arrive next, followed by the managers and head of departments, who may also be stockholders in the company. The employees of each department and other office staff are on the last rung.
In essence, stockholders have voting rights in a company. For the number of stocks they own, they can vote for a director of their choice during elections. Cumulative voting is one of the conveniently-used voting methods in corporate governance. Here we will tell how cumulative voting works.
The Theory and Purpose of Cumulative Voting
To begin with, you need to understand what voting in a company means.
Stockholders or shareholders of a company are people who own stocks. Ordinarily, the owners are the first stockholders. Important employees follow next, i.e., the ones who have been with the corporation since its inception.
Annual corporate elections are not a novelty, stockholders are required to vote for the board of directors (when a new member needs to be elected among chosen candidates).
Regular voting states that a stockholder is allowed one vote per stock or share. That is to say, he can use all his stocks for one director.
On no account is he allowed to divide the total number of stocks/votes the way he wants.
On the contrary, cumulative voting allows him to cast multiple votes - i.e., he may divide the total among the number of directors in whichever way he prefers. Cumulative voting vs. straight voting defines this as the main point of difference.
In short, cumulative voting rights allow you to vote for the director of your choice with more number of stocks than you actually hold.
For instance, 'n' stocks and 'x' number of directors would allow you to vote (n*x) times for one director, or you may divide (n*x) among the 'x' directors.
The basic purpose of cumulative voting is to help stockholders who own fewer stocks so that they get more leeway to vote for the director of their choice.
Here is an example of cumulative voting for you to understand the concept better.
Assume that you, as a minority stakeholder, possess 100 shares in a company, and there are 5 directors among which one has to be selected.
In the statutory voting method, one vote is allotted per share; therefore, you can give 100 votes to each of the director (or to one of them), but no more than that.
In the cumulative voting method, you will have the privilege of (100*5) = 500 votes.
That means, you can give all 500 votes to the director of your choice, or 100 votes to each, or 200 for one and 75 to each of the other 4, and so on.
You may also consider not voting at all―you may give 400 to one director and 100 to another, and not vote for the others at all.
Formula: V = [(S * D)/N+1] + 1
V = total number of necessary shares to elect a director
S = total number of voting shares available D = number of directors required N = number of directors to be elected
Now, assume that a company has 2,00,000 number of shares, and 2 directors are to be selected among 4. The number of voting shares required to elect would be: [(2,00,000 * 2)/4+1]+1, which equals to 80,001 shares.
It is a primary power tool for minority shareholders.
It helps distribute the voting power instead of solely concentrating on the major shareholders.
It assures the minority shareholder that he has some amount of power over the board.
With cumulative voting, it become less easier to cut off a director from the board, which would have otherwise been simpler, given the control of majority voters.
If the board of directors is subject to unfair division, the running of the company may be affected in future.
Some argue that this method may elect a director who may be an avid supporter of a particular group of shareholders alone.
Many believe that cumulative voting may reduce the overall strength of the board, allowing the company to be an easy target for opponents.
This tactic may create opposite views and hostility within the board.
Even within the cumulative voting method, there are different available voting strategies. You could use single transferable voting or plumper voting. While the former is an amalgamation of cumulative and fractional voting, the latter involves more than one vote allotment per candidate.