Board of Directors

Stockholders don’t have the authority to run an issuer’s day-to-day business operations. However, they still influence major decisions by voting for the individuals who serve on the board of directors (BODs). The BODs set a company’s overall direction through actions such as:

Hiring and/or firing senior-level employees

Managing senior-level employee compensation

Creating and implementing general company policies

Approving dividend payouts to investors

This setup is similar to a democratic republic in the United States. U.S. citizens don’t directly create or change laws, but they can vote for the politicians who do. If a politician isn’t doing the job well, voters can replace them in the next election. Stockholders work in a similar way: they don’t manage the issuer’s business, but they can vote in (and vote out) the people on the BOD who make major enterprise-level decisions. Companies use one of two voting structures for electing the BOD: statutory or cumulative. In both systems, each stockholder gets one vote for every share they own. The difference is how those votes can be allocated across open board seats.

Sidenote

How stockholders vote Stockholders can vote on various items, from the BOD to dilutive actions (covered later). Two primary ways for a stockholder to vote are at the annual stockholder meeting or through a proxy. Every year, publicly traded companies arrange and hold a stockholder meeting. For example, here’s a video of Tesla’s 2021 annual meeting. Several issues are discussed at these gatherings, including company performance, the outlook for the future, and items to be voted on. Most stockholders can’t attend these meetings but can still vote through a proxy. Proxies are substitutes for voting at these stockholder meetings. With the help of financial firms, the issuer sends proxies to the shareholders that don’t attend the annual meeting. That way, every stockholder has voting power, regardless of their ability to participate in the in-person meeting.

Statutory

A statutory voting structure requires stockholders to spread their votes evenly across the open BOD positions. In other words, you can cast only the number of votes you have per seat for each position. This structure tends to benefit larger stockholders.

An investor owns 100 shares of stock with a statutory voting structure. There are 3 open board positions.

The investor has 300 votes

100 shares x 3 open positions The investor can only apply up to 100 votes per open position

Cumulative

A cumulative voting structure lets stockholders allocate their total votes across the open BOD positions in any way they choose. This structure tends to benefit smaller stockholders.

An investor owns 100 shares of stock with a cumulative voting structure. There are 3 open board positions.

The investor has 300 votes

100 shares x 3 open positions

The investor can apply up to 300 votes in any manner

A key difference is that cumulative voting allows a stockholder to concentrate all votes on a single board seat. Using the example above, suppose the stockholder strongly supports John for one BOD position:

With statutory voting, they could apply only 100 votes to John. With cumulative voting, they could apply up to 300 votes to John.

Because votes can be concentrated this way, cumulative voting structures often favor small investors. A group of smaller shareholders can work together and devote all their votes to one open position. Watch this video to better understand how voting rights work in the real world:

Key points

Board of Directors (BOD)

Responsible for the general direction and success of a company

Stockholders control who serves

Proxies

Voting materials used by investors unable to attend the annual meeting

Statutory voting structure

Applies votes on a per position basis

More beneficial for large stockholders

Cumulative voting structure

Can apply all votes to one position

More beneficial for small stockholders