In Finance, what is Majority Voting?

Within the field of finance, majority voting is the process by which shareholders of a company receive one vote each to make decisions regarding the direction of business initiatives and overall decision making. Also known as cumulative voting, the process of majority voting grants direct control of the company to the shareholders that own the most stocks. For example, if 100 different people own one percent of the company each, then each of the 100 individuals has a single vote. However, as larger swaths of control are accumulated by individuals, greater control is relegated to those stockholders. This means that any individual or group that controls 51 percent of the company's shares controls each voting event and thereby the direction of the company.

Usually, it is beneficial for a company to be controlled by a majority shareholder rather than a number of smaller level shareholders. This provides direction to the actions of the company instead of creating a situation in which the company changes position with each vote. For example, if the decision to open a new retail location were being made by a company, the majority voting process could result in a positive outcome for the new location's establishment. If the sales of said location were not profitable for the first six months, the decision could be made through majority voting to close the facility before giving it a proper chance.

Since the concept of majority voting has such a strong impact on the activities of a business, the existence of corporate shareholders is prevalent within the financial industry. Institutional investors purchase shares of companies in order to control them. This can occur either through the actions of wealthy investors on an individual basis or through the form of investment groups acting on behalf of an organization. Most often in modern business, venture capital groups are responsible for assembling the majority stakes in companies. This is essentially how one company purchases the majority stake in another company and makes it a subsidiary, giving the overall controlling company majority voting rights over the smaller firm.

The process of majority voting usually takes place in a board room or a shareholders meeting. When large shares of the company are accumulated by a small number of individuals, the controlling powers themselves either attend the meetings or elect representation to vote for their choice in the company's direction. However, many times the decisions are important enough to require a vote of all shareholders with an interest in the company. These meetings are not generally held as often as meetings in which the firm has less shareholders. In this case, a board of directors with no ownership is usually elected and takes part in majority voting on business affairs.