How to be a more involved investor
Does participating in the decision-making process of a company sound appealing to you? If so, you’re in luck – because that’s exactly what happens when you become a company shareholder. Here’s everything you need to know about the voting rights of shareholders (and how you can use them to influence the success of your investment).
What are voting shares?
Voting shares give shareholders the right to vote on how a company’s corporate policy is made, including electing the board of directors. A company's corporate policy provides guidance for decisions and actions – for example, a shareholder would have the right to vote on a company’s dividend policy that determines how dividends are paid out.
But first things first – did you know that not every type of share grants voting rights? A company can issue different classes of shares with different levels of voting rights and dividend access. For example, a company might have two share classes, Class A and Class B, with Class A usually carrying more voting rights.
There are two main types of stock that make up these classes: common and preferred shares.
Common shares are the most frequently issued type of stock – which seems obvious given the name – and they are typically a company’s Class A shares. When people talk about stocks, they are usually talking about common shares.
Common shares are traded on an exchange and the price per share is determined by supply and demand. High demand drives prices up and low demand causes prices to drop. By investing in common stock, you can make money through dividends (frequent payments companies make to shareholders, usually out of their profits) or by selling your shares for a capital gain. (By the way, we have a whole blog on how the stock market works if you want more details on this).
Even if a company issues dividends, they are not guaranteed for common shareholders – you are last in line for dividend payouts and there is a possibility you don’t receive them at all. Some common shares don’t even grant dividends.
Financial returns are not the only benefit of common shares – voting rights are also granted. Most companies grant shareholders one vote per common share, which allows shareholders with larger investments to have more weight in decision making. However, that’s not always the case. Sometimes each shareholder only gets one vote, regardless of how many shares they own.
Companies issue common shares to raise capital to fund their operations, hoping that as the company grows, share prices will increase too – which would be a huge benefit for investors. Common shares are first issued when a company goes public in what is called an initial public offering, or IPO. The company can issue more shares after their IPO as well, but this decision depends on a few things, like their need for more capital.
Preferred shares are kind of like a mix between a bond and a stock. They offer fixed payments in the form of dividends (similar to the fixed interest payments made by bonds) but they can also increase in value, just like any other stock. Usually, a company’s Class B shares are preferred shares.
However, preferred shares are less volatile than common shares (the price per share doesn’t go up and down as much) because their dividends are fixed and often higher, which means less of their value comes from company performance. This means there is less potential for the price of a preferred share to go up -- in fact they usually trade within a few dollars of their issue price. That makes them appealing to investors who are looking for stability in their portfolio.
Interestingly, large institutions often buy preferred shares in bulk for tax advantages (kind of like shopping at Costco). This is a big reason why companies issue them – it’s a simple way to raise a lot of capital. But preferred stocks also trade on stock exchanges for individual investors with ticker symbols that are slightly different from common shares.
Preferred shares typically don’t include voting rights, but dividends are essentially guaranteed and often higher than dividends from common shares. Preferred shareholders are first in line when it comes to receiving dividends. If a company doesn’t have the cash to pay dividends to both common and preferred shareholders, preferred shareholders are paid first.
Dividends aren’t 100% guaranteed because in the event a company goes bankrupt, that company will have to pay creditors first and preferred shareholders second – if there’s enough cash leftover. Companies can also defer paying dividends without penalty if profits aren’t looking good.
Why do voting rights matter?
The difference in voting rights from different classes of shares gives companies more control over their operations. Share classes also protect companies from hostile takeovers (the takeover of a company whose management is unwilling to agree to a merger), while still providing a source of funding.
For example, in 2015 Google implemented a multi-class share structure because the founders owned less than majority ownership of the company’s stock, but still wanted to have control over big business decisions. Class A shares are held by regular investors and come with one vote per share, Class B shares are held by the founders and have 10 votes per share, and Class C shares are typically held by employees and have no voting rights. By structuring it this way, the most voting control is in the hands of the founders.
Activist investors can encourage owners of voting shares to vote for or against an action by purchasing a significant stake in a company. By purchasing enough shares, the investor can obtain a seat on the board of directors, which lets them have a greater say in the operations of the company.
Activist investors usually target companies with problems they believe they know how to fix. Because a large number of shares are required to have more influence, usually wealthy individuals or hedge fund owners are the types of investors who become activist investors.
Activist investors can also be “hostile,” where the goal is a complete overhaul of the board to make dramatic changes to the company’s operations. In these cases, there is usually a strong disagreement between the corporation and shareholders about major strategic issues.
What can common shareholders vote on?
Shareholders who own voting shares receive ongoing communications from the company, notifying them of any matters that might require their vote.
Common questions shareholders get to vote on include:
- who makes up the board of directors
- the issuing of new securities
- corporate actions like mergers or acquisitions
- approving dividends
- making big changes to the company’s operations
Voting rights for most companies are different from voting rights you might be familiar with in the democratic process. It’s (usually) not a one vote per person situation – as we mentioned earlier, the number of votes a shareholder has depends on how many shares they own. For example, someone who owns more than 50% of a company’s voting shares represents a majority of the vote and thus has a controlling interest in the firm.
An investor (or a group of investors) with a controlling interest has a lot of power and influence over the operational and strategic decisions of a company – they essentially have veto power over any decisions made by board members. For example, Mark Zuckerberg has a controlling interest in Meta (formerly known as Facebook).
With large public companies, like Twitter for example, a shareholder with a lot less than 50% of voting shares can still have plenty of influence over the company. A single shareholder with 5-10% ownership can push for changes at shareholder meetings and obtain a seat on the board. Elon Musk was Twitter’s largest shareholder when he decided to purchase a 9.2% stake in the company in April 2022 – although he declined a seat on the board.
Because Elon voiced his dissatisfaction with how the Twitter platform is run and bought shares to gain more influence over the problems he saw, he could be considered an activist investor.
So, how does voting work?
Companies typically hold annual meetings, usually between March and June, that shareholders are allowed to attend (although more meetings can occur throughout the year). Shareholders can get information about what’s going on with the company and have their voice heard on company issues by attending them. Shareholder meetings are also typically the only time the shareholders will interact with company directors.
Shareholders are entitled to advance notice of what will be covered in the meeting. The activities of shareholder meetings can vary, but in general there’s:
- a discussion of what happened in the previous meeting
- a presentation of financial statements
- an opportunity for shareholders to ask questions
- a vote on the board of directors and any other issues
All shareholders receive a package of proxy materials before the annual meeting, which are documents that provide any information needed to make informed votes on company issues and tell you how to designate a proxy. Voting by proxy allows you to vote without being physically present at the meetings. This means you can either vote by mail or you can designate a third party to attend the meeting and vote on your behalf.
You can vote in a few different ways – in person, by mail/phone, or online (psst…Flahmingo allows you to use your voting shares in-app).
When deciding whether to invest in a stock, it might be helpful to look for news about past shareholder meetings to find out what shareholders have previously voted on and how the voting process looks in that company. That way, you can make the best choices on how to cast your votes.
Why would shareholders want to vote?
The primary reason a shareholder would want to have voting rights in a company is to take part in the decision-making process. If you have ideas on how the company should be run, voting helps you voice them.
Voting rights essentially allow shareholders to influence how successful their investment is because the issues they get to vote on somewhat determine the profitability of the company – like choosing a board of directors.
Voting rights are also a way for shareholders to hold board members accountable for their decisions. Board members have to be voted in, so there’s an incentive for them to listen to shareholders when determining the company’s operations.
Are there any rules or regulations around voting?
In privately held companies, the corporation can restrict shareholder voting rights. In publicly traded companies, however, shareholder voting follows company rules or bylaws as well as local and federal regulations. This means voting rights can look very different from company to company but in general they have a similar structure.
Because a corporation’s officers and board of directors manage its daily operations, shareholders don’t get to vote on day-to-day operational or management issues. They do, however, get to vote in or out members of the board of directors, which affects daily operations of the company.
Only a shareholder of record is able to vote at a shareholder meeting – this is a shareholder whose name is listed on the company’s books as the owner of shares at a particular date (called the record date). Shareholders not listed in the record on the record date can’t vote.
Companies also typically require something called a quorum for voting at a shareholder meeting. This just means there has to be a minimum number of shareholders with voting rights present at a shareholder meeting before any changes can be made. A quorum is usually reached when the shareholders at the meeting own over half the corporation’s shares.
There’s more to consider when buying stocks than just financial gains. Voting rights are an exciting part of being a stockholder because you get to voice your opinion – and maybe even influence your returns.
If having more control over your investment sounds exciting to you, you should check out Flahmingo! We make it flock’n easy to use your voting shares in our app – we’re all about making investing accessible to everyone.