[This is the first in a two part series on the rights of corporate ownership.]
For years I have been an advocate of directly investing in stocks and bonds, as opposed to investing in pooled assets such as funds. However, with direct ownership of stock comes a little extra work and knowledge of what you own.
Holders of common stock exercise control of a corporation by electing a board of directors and by voting on corporate policy at annual meetings. In addition to voting for members of the board of directors, stockholders are entitled to vote on matters involving:
• issuance of senior securities
• stock splits
• substantial changes in the corporation’s business
Stockholders do not have the right to vote on either the timing or the amount of cash or stock dividends. Those matters are left to the discretion of the board of directors.
The following is a description of a number of rights and actions stockholders are entitled to.
• Calculating the number of votes: A stockholder is entitled to cast one vote for each share of stock they own. Depending on the bylaws of the company and on applicable state laws, a stockholder may cast their votes in one of two ways. These two ways are known as statutory voting and cumulative voting.
• Statutory voting: Under the statutory voting system, a stockholder who votes in an election of members to the board of directors may cast one vote per share owned for each position. To illustrate this, if three directors are to be elected, the stockholders with 100 shares may cast from zero to 100 votes for each of the three positions. In the event that the stockholder casts fewer than 100 votes for a candidate for one of the available seats, the remainder of those 100 votes for may not be cast for another candidate for the same seat.
A candidate needs to receive a simple majority (more than 50 percent of the votes cast) to be elected to the board. Statutory voting tends to put majority stockholders (those who own large blocks of stock) at the advantage over investors who own smaller amounts of stock in the company.
• Cumulative voting: Cumulative voting entitles the stockholder to the same total number of votes as the statutory system, but places no restriction upon allocation of those votes. In the example above, the stockholder has a total of 300 votes (one vote per share times the number of candidates). Under a cumulative voting system, those 300 votes could be cast in any manner the stockholder chooses. The stockholder could cast all 300 votes for a single candidate or split them in any fashion between two or more candidates.
In companies with cumulative voting rights, minority stockholders have a better chance of electing directors, thereby gaining representation on (although not necessarily control of) the board. Election under cumulative voting requires a plurality of the votes cast (the most votes, rather than just a simple majority).
• Proxies: Because stock holders of corporations sometimes find it difficult to attend annual stockholders’ meetings, many vote by means of a proxy. A proxy is a legal document that can be used by a stockholder who wants to authorize another party to vote their shares at the meeting. Proxies must be in writing and typically take the form of a limited power of attorney. Proxies are valid only for the specified meeting and are intended to be used to cast votes only on matters addressed at that meeting.
The voting authorization given through a proxy is revocable by the stockholder in the event they later choose to attend the meeting. A proxy may also be revoked by another proxy executed at a later date by the stockholder, and all proxies become invalid at the death of the stockholder.
Parties involved in matters scheduled for discussion and vote at an annual meeting will often contact stockholders directly and solicit their proxies in hopes of gaining control over those votes. Stockholders have been known to receive multiple proxy solicitations if a proposal coming up for vote is at all controversial.
The Securities Exchange Act of 1934 empowered the Securities and Exchange Commission (SEC) to regulate the solicitation of proxies. Corporations or individuals who solicit proxies must supply detailed and accurate information to the stockholders about the proposal(s) on which they will be asked to vote. In addition, the proxy solicitor must submit this same information to the SEC for review prior to soliciting the stockholder.
[The second article in this series will appear in next week’s column]
Quote of the Week: “The trouble with most of us is that we would rather be ruined by praise than saved by criticism.” — Norman Vincent Peale
Bart Ward is the chief executive officer of Ward & Co. Ltd. an Anoka-based registered investment adviser – specializing in the management of stock and bond portfolios in companies which are listed on the NYSE.