Voting Structures for Businesses

All corporations and cooperatives have some sort of democratic model for decision making. There are two major voting structures for all businesses. The first: “one share, one vote;” means that an investor gets one vote for each share of a company they own. The second: “one member, one vote;” means that each cooperative member or employee owner gets one vote.

Traditional Method: One Share = One Vote

Traditional corporations (think: those traded on Wall Street) have a stock structure for raising capital and participating in voting. Often, corporations will have two types of stock: common stock and preferred stock. Common stock generally entitles each shareholder to one vote for each share of stock they own (companies may also choose to designate more than one vote per share of common stock owned). Corporate laws, including in Delaware, require at least common stock to have voting rights. Preferred stock on the other hand, often has no voting rights and instead offers benefits such as guaranteed dividends. Further, a business could offer more than one vote per share, through its stock structures.

Since there are no restrictions on the number of shares of stock a person can own, a small number of  investors can own a significant proportion of the shares. With the one share, one vote structure, these few investors, who may be corporations or natural persons, can dominate the voting. While technically a voting process, this structure undermines democratic decision-making and concentrates power in corporations in the hands of wealthy investors and other corporations.

Cooperative-Preferred Method: One Member = One Vote

In contrast, cooperatives are often structured so that each member is entitled to a single vote. Voting power may also be tied to patronage, equity, or the membership of a cooperative member (if a cooperative is a member of another cooperative). These structures are a hallmarks of cooperative articles of incorporation and create a system in which a members voting power is determined by their input into the cooperative.

This system decentralizes the importance of wealth in creating power within a corporation. Through a one member, one vote structure, cooperatives can have a significantly more democratic approach. Further, cooperatives can create a class of members called “investor members.” These members could have no voting rights or could only have voting rights in major business decisions, such as mergers and acquisitions. Limiting the power of investor members further empowers those who contribute to the business in ways other than financial investment.

Alternatives to One Member, One Vote

This blog has written a series of posts on mission protection mechanisms, which can be used to preserve direction of the company. With a one member, one vote standard, there is the possibility that the members might vote to take the company in a direction contrary to the company’s mission. Two mechanisms that we’ve previously highlighted are Golden Shares and Voting Trusts and Agreements. Golden Shares are particular shares in an organization that have special voting rights, which may include voting in situations that other members may not. Voting Trusts and Agreements describe members who choose to vote as a bloc.