Cumulative voting gives minority shareholders the opportunity to be represented on a company’s board of directors. To understand it, you first have to know what it means when a company does not have cumulative voting.
When a company sets its number of directors — say, three for example — each shareholder is entitled to one vote per share for each director position. If I own 60 shares and you own 40, my 60 votes will beat your 40 votes for the first position; my 60 votes will beat your 40 votes for the second position; and my 60 votes will beat your 40 votes for the third position.
Net result: I, as the majority shareholder, have the power to elect the entire board of directors. You, as the minority shareholder, have no power at all. Some might legitimately wonder why I should get a 100% say when I only own 60% of the company.
Cumulative voting solves this perceived unfairness.
Cumulative voting allows each shareholder to aggregate the votes to which the shareholder is entitled and then cast them in whatever number the shareholder chooses. Thus, following our example, I would have a total 180 votes (60 shares for three positions) and you would have a total 120 votes (40 shares for three positions). I can cast my 180 votes among the three open seats however I choose. And you can do the same with your 120 votes.
Now what happens? If you are smart, you will realize that you can guarantee yourself at least one representative on the board of directors by casting no less than 61 of your votes for a single individual. After all, I cannot allocate more than 61 of my 180 votes for more than two individuals.
And just like that, you as a minority shareholder now have a say on the board.
Where does this right of cumulative voting come from? A company’s articles of incorporation (sometimes called a certificate of incorporation) is key. In the State of Washington, for example, cumulative voting is implied unless the company affirmatively “opts out” in its articles of incorporation. In the State of Delaware, by contrast, the right does not exist unless the company affirmatively “opts in” in its certificate of incorporation.
Of course, all may not be lost in the absence of cumulative voting. Indeed, many companies that are formed with the help of a capable corporate lawyer routinely exclude cumulative voting in favor of a well-drafted shareholder agreement. And that is another topic for another day.