Well, shareholders vote for the directors and the shareholders with the highest percentage ownership interests in the corporation usually votes for themselves. As such, those shareholders essentially elect themselves to the Board. Let’s go over an example to clarify.

Assume ABC, Inc. is a private closely-held corporation with 10 shareholders. Five of the shareholders own 15% each of the corporation and the other 5 shareholders own 5% each. If you’re doing the math, 15% x 5 = 75% and 5% x 5 = 25% (75% + 25% = 100%).

Now, assume that the bylaws of ABC, Inc. only allow for 5 directors to sit on the Board. Who do you think will be elected to the Board? Most likely, the 5 shareholders that each own 15% in the corporation because they’ll all vote for themselves. But that may not be the case, depending on how they really vote and the type of voting system that the corporation uses.

There are 2 main voting methods used with corporations, which include (i) straight voting, or (ii) cumulative voting. Straight voting is by far the most common and the default method for voting. With straight voting a shareholder must vote for every open seat, and can only vote up to his or her total share for each open seat. In contrast, with cumulative voting a shareholder can consolidate all of his or her votes for one candidate. Let’s go over an example to clarify.

Under the straight voting system, if Bill has 100 shares of ABC, Inc. he can vote up to 100 times for each of the 5 directors’ seats. So, Bill has 500 votes to use, but he can only cast 100 votes for each seat. In other words, Bill would vote 100 times for Seat 1, 100 times for Seat 2, etc. However, under cumulative voting, if Bill was voting for 5 different directors, he could take all his 500 votes and vote for 1 person. This is called consolidating his voting power. As you can see, with cumulative voting a person with less shares has a better chance of being elected to a director’s seat.

NOTE: Voting for directors takes place through (i) classified elections – where every director’s seat is voted upon (usually on an annual basis), or by (ii) staggered elections – where a few directors’ seats are voted on each voting cycle. Think of classified elections like the U.S. House of the Representatives where every member runs for election every 2 years. Think of staggered elections like the U.S. Senate where only 1/3 of the senators run for election every 2 years.

Next, let’s take a look at how the Board of Directors’ meeting run.