Voting rights

3 key takeaways

Voting rights allow shareholders to participate in important corporate decisions, ensuring that the management is accountable to the owners of the company.The extent of voting rights varies depending on the type of shares owned, with common shares typically granting voting rights and preferred shares sometimes offering limited or no voting rights.Exercising voting rights can be done in person at shareholder meetings or through proxy voting, enabling shareholders to influence corporate governance even if they cannot attend meetings.

What are voting rights?Voting rights are the privileges granted to shareholders that allow them to vote on various corporate matters. These rights are typically associated with common shares and give shareholders a say in the direction and management of the company. Voting rights are fundamental to corporate governance, as they enable shareholders to influence key decisions that affect the company’s future.How do voting rights work?Voting rights function through a structured process that allows shareholders to cast votes on important issues:Shareholder meetingsVoting typically occurs at annual general meetings (AGMs) or special shareholder meetings. These meetings provide a platform for shareholders to discuss and vote on significant corporate matters.Proportional voting powerThe number of votes a shareholder has is usually proportional to the number of voting shares they own. For example, owning 1,000 voting shares typically grants 1,000 votes on each matter put to a vote.Proxy votingShareholders who cannot attend meetings in person can often vote by proxy. This involves authorizing another person to vote on their behalf, ensuring their voting rights are exercised even if they are absent from the meeting.ExampleA tech company holds an AGM where shareholders vote on the election of new board members. A shareholder owning 5,000 voting shares can cast 5,000 votes for each board position. If there are 10 million voting shares outstanding, this shareholder controls 0.05% of the total voting power.Importance of voting rightsVoting rights are crucial for several reasons:

Corporate governance: Voting rights enable shareholders to participate in the governance of the company, ensuring management accountability.Strategic influence: Shareholders can influence major corporate decisions, such as mergers and acquisitions, strategic initiatives, and executive compensation.Protection of interests: Voting rights allow shareholders to protect their interests by participating in decisions that affect their investments and the company’s direction.

Types of voting rightsCommon sharesCommon shares typically come with full voting rights, allowing shareholders to vote on all major corporate matters, including the election of directors and approval of significant transactions.Preferred sharesPreferred shares usually do not carry voting rights, although some may have limited voting rights under specific conditions, such as when dividends are in arrears or during special circumstances affecting the company.Dual-class sharesSome companies issue dual-class shares, where one class has enhanced voting rights compared to the other. This structure often allows founders or insiders to retain control over the company while raising capital from public investors.ExampleA media company might issue Class A shares with one vote per share and Class B shares with ten votes per share. This dual-class structure enables the company’s founders to maintain control over strategic decisions despite holding a minority of the total shares.Impact of voting rights on corporate decisionsBoard electionsVoting rights are primarily used to elect the board of directors, who oversee the management and strategic direction of the company. Shareholders vote for board candidates based on their vision, experience, and alignment with shareholder interests.Major corporate actionsShareholders use their voting rights to approve or reject major corporate actions, such as mergers, acquisitions, or significant asset sales. These decisions can significantly impact the company’s future and shareholder value.Corporate policiesVoting rights enable shareholders to vote on key corporate policies, such as amendments to the company’s bylaws, executive compensation plans, and shareholder resolutions.ExampleA pharmaceutical company proposes a merger with a biotech firm. Shareholders use their voting rights to approve or reject the merger based on their assessment of the potential benefits and risks.Challenges and criticisms of voting rightsConcentration of powerIn companies with dual-class share structures, voting power may be concentrated in the hands of a few individuals, reducing the influence of ordinary shareholders and potentially leading to governance issues.Limited influence for small shareholdersIndividual shareholders with small holdings may feel that their votes have little impact on corporate decisions, which can discourage active participation in governance.ExampleA social media company with a dual-class share structure allows its founders to control 60% of the voting power despite owning only 20% of the total equity. This concentration of power can lead to concerns about the alignment of management decisions with the interests of ordinary shareholders.Exercising voting rights effectivelyStaying informedShareholders should stay informed about the company’s performance, strategic plans, and key issues that will be voted on. This knowledge allows them to make informed voting decisions.Participating in meetingsWhenever possible, shareholders should attend shareholder meetings or participate through proxy voting to ensure their voices are heard.Collaborating with other shareholdersShareholders with common interests can collaborate to pool their votes and influence corporate decisions more effectively.ExampleInstitutional investors, such as pension funds and mutual funds, often collaborate to exercise their voting rights collectively. By pooling their votes, they can exert significant influence on corporate governance and strategic decisions.Understanding voting rights and their role in corporate governance is essential for investors, company management, and policymakers. For further exploration, related topics include corporate governance, shareholder rights, proxy voting, and dual-class share structures. These subjects provide deeper insights into the mechanisms and implications of voting rights and their impact on corporate decision-making.