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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
The unusual thing about last week’s New York Democratic mayoral primary wasn’t who voters chose, but how they did it. The party employs a ranked choice system: select five candidates in order, and if your first pick comes last, it’s the second choice that counts. This favours consensus. The outcome is less likely to be someone that most people dislike.
There’s a corporate counterpart to this, at least in some corners of the American market: cumulative voting. It works thusly. Imagine a company has five board seats up for election, and a greater number of candidates vying to fill them. Holders of each share would get five votes. But, unusually, they can distribute them as they see fit: one vote each for five candidates, all five votes on one candidate, or anything in between.
This model took off in the 1870s, as an attempt to weaken the power of plutocratic insiders who got their way every time. By the 1940s, cumulative voting got strong support from campaigners trying to get women on boards, as law professor Sarah Haan has recounted. From the 1950s, it started to wane. A handful of big US companies, including Walgreens and Abbott Laboratories, retain it even now, but they are in the minority.
Despite its near extinction, cumulative voting has much to recommend it. A company with a founder that holds 51 per cent of the vote would, under the typical system, be able to strong-arm every directorial appointment. Think Mark Zuckerberg at Meta Platforms. But with cumulative voting, minority shareholders could pool their votes on a candidate and get them a seat at the table.
Granted, sometimes it works too well — by making it hard to remove directors who are at loggerheads with the rest of the board. That happened at NextGen Healthcare, where founder Sheldon Razin remained entrenched for 47 years. Relations with his fellow directors went from bad to worse, not helped by his unauthorised attempts to sell the company. Shareholders ousted him, and scrapped cumulative voting, in 2021.
Delaware, where most companies are based, offers a choice, and unsurprisingly, almost every company chooses the one-vote-per-candidate option instead. Among big institutions, fans of the practice are hard to find. BlackRock and Vanguard both counsel against it, but then their direct access to boards means they already wield influence in other, less transparent ways.
Only a handful of states still mandate cumulative voting. California requires it for unlisted companies, but the requirement is easily skirted, as University of North Carolina professor John Coyle has noted, through “shareholder agreements” that commit investors to vote the same way. Besides, a seat at the table may merely give minority investors a better view of the ways in which they are being marginalised. But it’s better than nothing.
In the world of politics, New York’s quirky set-up proved unnecessary this time: Zohran Mamdani prevailed by a wide margin in the first round, and his rival Andrew Cuomo conceded defeat. But the corporate analogue, and the lamentable reasons for its gradual demise, are worth studying. Mamdani may not have benefited from consensus-driven voting, but there are any number of minority investors who would.
