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Owning common stock doesn’t just come with an equity stake in a public company. It also gives the shareholder certain rights—notably, the right to vote on corporate matters, such as electing board members, on corporate decisions and matters that directly affect their stock ownership (like stock splits, mergers, or acquisitions), executive compensation packages, and other administrative issues.
Key Takeaways
- Anyone who owns stock in a company has a voting right to the decisions that the company makes.
- The fewer shares someone owns, the less voting power they have, as each share is one vote.
- Voting has a significant impact on share prices, which is why investors should learn about a company’s proposed decisions.
How Voting Rights Work
Common stock ownership always carries voting rights, but the nature of the rights and the specific issues shareholders are entitled to vote on can vary considerably from one company to another. Some companies grant stockholders one vote per share, giving shareholders with a greater investment in the company a greater say in corporate decision-making.
Shareholders can exercise their voting rights in person at the corporation’s annual general meeting (AGM) or other special meeting convened for voting purposes, or by proxy. Proxy forms are sent to shareholders along with their invitations to attend the shareholders’ meeting.
These forms list and describe all the issues on which shareholders have the right to vote. A shareholder may elect to fill out the form and mail in their votes on the issues rather than voting in person. Shareholders can also enter their votes over the phone or on the internet.
Important
A company’s common shareholders may have voting rights but get paid after preferred shareholders in the event of liquidation.
How Voting Rights Influence a Company’s Decisions
Voting rights give shareholders a significant amount of influence over the success of the company and their investment. For instance, decisions made at the annual shareholders’ meeting can end up leading a company’s stock price to double or decline. Therefore, shareholders need to take advantage of the opportunity to positively influence corporate direction.
Shareholders should thoroughly analyze proposals being presented for a vote. For example, a company may need a poison pill to thwart a possible takeover. While this may benefit management, it may not be in the best interests of shareholders who could realize substantial capital gains. Any proposed changes to the company’s bylaws should be carefully scrutinized, as should company management proposals to change legal or accounting firms.
Proposed stock options or split plans can significantly impact the value of existing shares, so such proposals merit careful evaluation by shareholders before voting. Another item for shareholder analysis is the company’s Compensation Committee Report. Investors should review the company’s compensation plan to determine things such as the overall reasonableness of executive compensation packages and how effectively bonuses are tied to actual performance.
What Happens in a Hostile Takeover
Because shareholders have a proportional influence per their stake, certain market movers or hostile activist investors will amass a large stake in a company by purchasing shares. When they have enough shareholder power to sway a vote, they will step in and direct the company in the direction that benefits them or they may purchase enough shares to become the majority shareholder of the company. When that happens, they can direct it more assertively.
What’s the Difference Between Common and Preferred Stock?
Common and preferred stock are two different types of equity ownership in a company. But they come with different rights. Common shares typically grant the investor voting rights while preferred shares get fixed dividend payments. They are also paid first if a company is liquidated.
What Is a Proxy Vote?
A proxy vote is vote or ballot cast on behalf of a shareholder who can’t attend a shareholder meeting. Proxy votes may also be cast for people who don’t wish to vote on certain issues.
What Are the Key Issues That Shareholders Can Vote On?
Common shareholders usually have one vote per share, which means investors with a substantial volume of shares have greater voting power. They can vote on issues like the election of the company’s board members, the issuance of new securities and initiation of corporate actions like mergers and acquisitions, and the approval of dividends. Owning common stock also gives a shareholder the right to vote on changes to corporate policies and operations.
The Bottom Line
Voting rights are generally granted to common shareholders of public companies. In most cases, one share equals one vote. These shareholders can vote on key issues like the election of a company’s board, corporate policies, how the company operates, dividends, and whether any new securities will be issued. Votes are cast at annual shareholder meetings or by proxy if they can’t attend.
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