Cumulative voting, also called accumulation voting or weighted voting, is a multi-voting system used by companies to promote a more proportional representation for shareholders. In cumulative voting, each shareholder is entitled to one vote per share, multiplied by the number of available director positions, with the votes being distributed in whatever proportion the shareholder prefers.
Understanding Cumulative Voting
Cumulative voting is used to provide minority shareholders with more power to influence the outcome of the election of the board of directors. Under cumulative voting, a shareholder can allocate all of their votes to a single candidate. Although the voting method provides minority shareholders with more election power, it is not a commonly used voting system among S&P 500 companies.
Hewlett-Packard (HPE) is an example of a company that has used cumulative voting in the past. However, in 2016, Hewlett-Packard eliminated the practice, citing “cumulative voting is incompatible, and fundamentally at odds, with a majority vote standard for electing directors – because it allows relatively small stockholders to elect directors who are not supported by a majority of the company’s shareholder base.”
Example of Cumulative Voting
Consider a shareholder who holds 100 shares in a company that uses cumulative voting. In addition, the company is currently looking to elect two directors.
Under cumulative voting, the shareholder would get 200 votes in total – the shareholder can vote the number of shares he owes multiplied by the number of seats that are up for election. With 200 votes, the shareholder can choose to vote whichever he likes: he can spend them all on one candidate, spread them evenly between the candidates, or dedicate, for example, 150 votes to one candidate and 50 votes to the other.
Cumulative Voting vs. Straight Voting
In shareholder voting, a company generally employs one of two voting systems – either cumulative voting or straight voting. To illustrate the difference between the two systems, consider the following example:
There are currently 100 shares outstanding with five director seats up for election. A minority shareholder currently owns 20 of the 100 shares outstanding.
In straight voting, the minority shareholder has one vote per share of owned stock to cast in regard to each available director seat. Therefore, in this case, he/she can only cast a maximum of 20 votes for any one director.
In cumulative voting, the shareholder’s 20 shares are multiplied by the number of available director seats – five – which increases their total potential number of votes – for each of the five director seats – to 100 (20 x 5 = 100). In other words, they can cast up to 100 votes – rather than 20, as would be the case with straight voting – for any individual director candidate.
Impact on Minority Shareholders
Cumulative voting is beneficial to minority shareholders, as it strengthens their ability to elect a director. In contrast to straight voting, shareholders are allowed to cast all of their votes for a single candidate under cumulative voting.
Recall the example above where there are 100 shares outstanding, five director seats up for election, and a minority shareholder who currently owns 20 of the 100 shares outstanding. To illustrate how minority shareholders benefit from cumulative voting, also assume that there is a majority shareholder who owns the remaining 80 shares of the company.
With five director seats up for election, the minority shareholder gets 100 votes and the majority shareholder receives 400 votes. In total, there are 500 votes. Recall that in straight voting, the minority shareholder can only vote for each candidate 20 times. However, that is obviously not enough to ensure that the candidate is elected. Under cumulative voting, the minority shareholder can allocate all 100 of his votes for one candidate and help ensure that the candidate is elected.
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