Board of Directors | Rights of common stockholders | Common stock

Board of Directors

Stockholders don’t have the authority to manage an issuer’s business operations. However, they maintain some influence over big business decisions through their power to vote for the individuals who serve on the board of directors (BODs). The BODs determine the general direction of a company through a variety of different actions, including:

Hiring and/or firing senior-level employees
Managing senior-level employee compensation
Creating and implementing general company policies
Approving dividend payouts to investors

This system is similar to the democratic republic in the United States. US citizens do not have the power to create or adjust laws, but they maintain the ability to vote for the politicians that do. If a politician isn’t performing well at their job, citizens tend to vote them out and replace them with another person. Stockholders function similarly; they do not manage an issuer’s business, but vote in (and vote out) people to serve on the BOD that are in charge of big enterprise decisions.

Companies have one of two voting structures for the BOD: statutory or cumulative. Each stockholder gains one vote for every share they own, but the way votes are cast depends on the company’s voting structure.

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 cannot 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 allows stockholders to apply only the amount of votes they have to each BOD position. This type of voting structure is more beneficial for 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 allows stockholders to apply the total number of votes they have to any BOD position. This type of voting structure is more beneficial for small 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

As you can see, a cumulative voting structure allows investors to apply all their votes toward one board position. Using the numbers above, assume the stockholder liked John for a BOD position. They could only apply 100 votes to John with a statutory voting structure, while they could apply 300 votes with a cumulative voting structure.

With this disproportionate voting style, cumulative voting structures tend to favor small investors. With the ability to apply all votes in one manner, a few small shareholders could work together to 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

Board of Directors

Hiring and/or firing senior-level employees
Managing senior-level employee compensation
Creating and implementing general company policies
Approving dividend payouts to investors

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.

Statutory

A statutory voting structure allows stockholders to apply only the amount of votes they have to each BOD position. This type of voting structure is more beneficial for 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 allows stockholders to apply the total number of votes they have to any BOD position. This type of voting structure is more beneficial for small 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

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