Cumulative Voting Rights - Explained
What are Cumulative Voting Rights?
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What are Cumulative Voting Rights?
Cumulative voting refers to a system of voting used by companies when electing the directors of a company. Cumulative voting allows a shareholder cast all their votes to a single candidate rather that share the votes across the number of directors vying for the position. In a typical voting system, a shareholder has the right to cast a vote for each director, in cumulative voting however allows a shareholder to cast all his votes for a single nominee regardless of the number of directors to be elected.
How does Cumulative Voting Work?
Cumulative voting is sometimes referred to as weighted or accumulation voting. This type of voting rights empowers investors to influence the appointment of a company's directors. It is a proportional voting system that allows investor cast votes according to the number of shares they hold and for whoever they like. For instance, an investor with 50 shares in a company can cast 50 votes. In a normal voting system, the 50 votes can be spread across different nominees vying to become directors. However, in cumulative voting, an investor can decide to toss all the 50 votes for a single nominee, thereby influencing the nominee's chance of winning the election. For an investor that has 100 votes, he can decide to split the votes across his two choicest nominees.
Benefit for Minority Shareholders
Cumulative voting rights does not only influence the election of a particular nominee, it also benefit the minority shareholders of a company. Minority shareholders who choose to exercise their cumulative voting rights are at liberty to toss all their votes to a single candidate. For instance, if many minority shareholders support a candidate, when they cast all their votes for the candidate, such a candidate has a better advantage of being appointed. Hence, the benefit of cumulative voting to minority shareholders is that it gives them the power to influence the outcome of an election to suit their desires.
Alternative to Cumulative Voting
Statutory voting is an alternative to cumulative voting, this type of voting system mandates shareholders to cast their votes for nominees in different positions, rather than direct their votes to a single nominee. Hence, if five positions are open in a company, an investor must split his votes for all the five positions that are open. Statutory voting is the opposite of cumulative voting that allows an investor to cast his entire votes for a single nominee vying for a vacant position in a company.
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