This section is from the book "Business Finance", by William Henry Lough. Also available from Amazon: Business Finance, A Practical Study of Financial Management in Private Business Concerns.
The obvious injustice and danger of permitting the holders of a majority of the voting stock - or rather, in many cases, the officials and others who can most easily procure for themselves the right to represent the majority of voting stock - to elect all the directors, and thereby to take full and unrestricted control into their own hands, has led to the growing popularity and the very general adoption of another method of voting: namely, the cumulative method.
Cumulative voting may be defined as a method whereby each shareholder may cast as many votes as he holds shares of stock, multiplied by the number of directors to be elected. A shareholder may cast all of his votes for one, or two, or more candidates, or he may distribute them in any other proportion he sees fit. Thus the minority shareholders may so combine and concentrate their votes as to make certain of electing one or more representatives to the board of directors.
To illustrate, let us assume that a corporation has 1,000 shares outstanding, 600 of which are in the hands of a majority party, and that five directors are to be elected. Under the usual system of allowing one vote to each share and voting for each director separately, the majority shareholders may pick out the full board of directors without any reference whatsoever to the wishes or interests of the minority. Under the cumulative system of voting, the majority party would have 5 times 600, or 3,000 votes altogether, at their disposal, and the minority party would have only 2,000 votes. If the majority party should attempt to elect all five directors, they could give only 600 votes to each one of the five; the minority party could meet this move by concentrating their 2,000 votes on three directors, giving each one 666 votes, and thus elect a majority of the board. In order to make themselves secure, the majority party, presumably, would concentrate on three directors, each one of whom would get 1,000 votes; and the minority party would concentrate on two directors, each one of whom would receive 1,000 votes. Each party would thus secure representation on the board in exact proportion to its shareholdings in the corporation. In practice the situation would never be quite so simple, but the result of giving representation in approximate proportion- to shareholdings would be obtained.
There appears to be no question but that cumulative voting tends to prevent injustice and exploitation, and that it leads to a more active interest on the part of the smaller shareholders, who have under this method a better chance to secure representation. Among the large companies which have adopted cumulative voting are the Anaconda Copper Mining Company and the Ingersoll-Rand Company. Cumulative voting is permitted by the laws of practically all the states, and is specifically required in some, including Pennsylvania and Illinois.