Majority voting

What Is Majority Voting?

Majority voting is a fundamental principle in corporate governance where a candidate or a proposal must receive more "for" votes than "against" votes to be approved or elected. This threshold ensures that directors on a board of directors or significant corporate actions reflect the affirmative support of a majority of the votes cast by shareholders. It is a key mechanism for promoting corporate governance and accountability, particularly in the election of company directors.

History and Origin

Historically, many companies, especially in the United States, used a "plurality voting" standard for electing directors. Under plurality voting, nominees who received the most votes were elected, even if they did not secure a majority of the votes cast. In uncontested elections, where the number of nominees equaled the number of available board seats, a single "for" vote could effectively elect a director. This practice often meant that directors could be elected even if a significant portion of shareholders withheld their vote or voted against them.⁵

The push for majority voting gained significant momentum in the early 21st century, largely driven by institutional investors and shareholder advocacy groups like the Council of Institutional Investors (CII). These groups argued that plurality voting diminished director accountability and reduced the meaningfulness of shareholder votes. The movement advocated for reforms that would ensure directors truly represented the will of the majority of shareholders. For instance, in 2010, shareholder pressure continued to build for majority voting rules.⁴, [REUTERS] By the mid-2000s, major stock exchanges like the New York Stock Exchange (NYSE) and Nasdaq began considering listing standards that encouraged or required majority voting, though progress was incremental. [HARVARD_LAW] The shift reflected a broader trend towards enhanced shareholder rights and more responsive corporate boards.

Key Takeaways

• Majority voting requires a director nominee or a proposal to receive more "for" votes than "against" votes to pass.
• It is predominantly applied in the election of directors for publicly traded companies.
• The adoption of majority voting aims to increase the accountability of directors to shareholders.
• While prevalent among larger companies, it is less common in smaller-cap companies.
• Different forms exist, including "consequential majority voting," which mandates resignation for directors failing to achieve majority support.

Interpreting Majority Voting

In the context of board elections, majority voting is a clear indicator of shareholder sentiment. If a director nominee fails to receive a majority of the votes cast, it signals that a significant portion of the voting shareholders does not support their continued service on the board of directors. Unlike older plurality systems where a nominee could win with minimal support in an uncontested election, majority voting demands active approval. This standard places greater responsibility on a company's nomination committee to propose candidates that are broadly acceptable to its investor base. The presence of majority voting provisions often reflects a stronger commitment to fiduciary duty and responsiveness to shareholder interests.

Hypothetical Example

Consider a company, "Tech Innovations Inc.," holding its annual meeting to elect three directors to its board. Tech Innovations Inc. operates under a majority voting standard for director elections.

Assume the following votes are cast for Director Candidate A:

• For: 100,000 votes
• Against: 80,000 votes
• Abstain: 20,000 votes

To determine if Director Candidate A is elected, only the "for" and "against" votes are typically considered. Abstentions generally do not count as votes cast for or against a nominee in majority voting calculations.

Total "votes cast" for the purpose of majority voting = For votes + Against votes = 100,000 + 80,000 = 180,000 votes.

For Director Candidate A to be elected under a majority voting rule, the "for" votes must exceed the "against" votes.
In this case, 100,000 ("for") is greater than 80,000 ("against"). Therefore, Director Candidate A is elected.

If, however, the votes for Director Candidate B were:

• For: 70,000 votes
• Against: 90,000 votes
• Abstain: 20,000 votes

Here, 70,000 ("for") is less than 90,000 ("against"). Director Candidate B would not be elected under a majority voting standard. The company's bylaws would then dictate the procedure for addressing this outcome, often involving the director tendering a resignation.

Practical Applications

Majority voting is primarily applied in the following areas within finance and corporate structures:

• Director Elections: This is the most common application. In uncontested elections, where the number of nominees equals the number of available board seats, directors must receive a majority of the votes cast to be elected. This is a significant shift from traditional plurality voting. Many publicly traded companies, particularly those in the S&P 500, have adopted this standard, often in response to shareholder activism and engagement efforts by groups like the Council of Institutional Investors.³
• Shareholder Proposals: While not always strictly "majority voting" in the same sense as director elections, many significant shareholder resolution proposals, such as those related to executive compensation or environmental, social, and governance (ESG) matters, require a majority of votes cast to pass.
• Mergers and Acquisitions: Major corporate transactions, such as mergers, acquisitions, or significant asset sales, typically require shareholder approval, often by a majority of outstanding shares or votes cast, as stipulated by company bylaws and regulatory requirements.

The adoption of majority voting reflects a broader evolution in corporate governance toward greater accountability and responsiveness to shareholders.

Limitations and Criticisms

Despite its benefits in enhancing accountability, majority voting is not without its limitations and criticisms:

• Symbolic vs. Consequential: A primary critique is that not all majority voting standards are "consequential." Many companies' bylaws state that if a director fails to receive a majority vote, they must tender their resignation, but the board of directors retains the discretion to accept or reject it. This can render the vote symbolic, as the board can choose to retain an unpopular director. The Council of Institutional Investors advocates for "consequential majority voting," where the resignation is irrevocable.²
• Low Failure Rates: Critics point out that directors rarely fail to receive majority approval, even at companies with majority voting. This raises questions about how much it truly challenges incumbent directors. Some research suggests that directors at majority voting firms are even less likely to fail to receive a majority of votes than those at plurality voting firms, prompting debate on whether this is due to deterrence, better selection, or shareholder restraint. [SSRN]
• Complexity for Shareholders: While intended to empower shareholders, the nuances between strict majority voting, majority voting with board-rejectable resignation, and "plurality plus" (where more "withhold" votes than "for" votes trigger a resignation offer) can be complex for individual investors engaging in proxy voting.
• Impact on Small-Cap Companies: While common among S&P 500 companies, the adoption rate of majority voting is significantly lower among smaller companies, particularly those in the Russell 3000 or Russell 2000.¹ This disparity means that a significant portion of the market still operates under less stringent voting standards for director elections.

Majority Voting vs. Plurality Voting

The key difference between majority voting and plurality voting lies in the threshold required for a candidate to be elected, particularly in uncontested elections:

Under plurality voting, shareholders can "withhold" their vote, but this typically has no legal effect on the election outcome. Majority voting, by contrast, gives teeth to "against" votes, as they directly contribute to a nominee potentially failing to reach the required threshold. While plurality voting remains appropriate for contested elections or those involving cumulative voting, majority voting is increasingly the standard for uncontested director elections.

FAQs

Q: What does "votes cast" mean in the context of majority voting?

A: "Votes cast" generally refers to the "for" and "against" votes, excluding abstentions. For a director to be elected under majority voting, the number of "for" votes must exceed the number of "against" votes among those cast.

Q: Why is majority voting considered better than plurality voting?

A: Majority voting is considered better because it increases director accountability. It ensures that directors elected to the board of directors have the affirmative support of a majority of the shareholders who cast a vote, rather than simply being the candidate with the most votes in an uncontested race. This strengthens corporate governance.

Q: Do all companies use majority voting for director elections?

A: No. While many large companies, particularly those in the S&P 500, have adopted majority voting, it is less common among smaller and mid-cap companies. Some companies still use plurality voting, especially for director elections where the quorum is met but few votes are cast.

Q: What happens if a director doesn't receive a majority vote?

A: If a director doesn't receive a majority vote, the outcome depends on the company's specific bylaws and corporate governance policies. Typically, the director is required to tender their resignation. However, the existing board often has the discretion to accept or reject this resignation. In "consequential majority voting," the resignation is irrevocable, meaning the director must leave the board.