In this post last week, I wrote about the Dodd-Frank Act’s requirement that companies subject to the SEC’s proxy rules include in their proxy statements a resolution regarding the frequency of shareholder advisory votes on executive compensation. I noted that a plurality vote rule is not be the best way to determine shareholder preferences and suggested that other voting systems are more useful. Some have asked me how these voting rules work.

Under an “approval voting” system, shareholders are allowed to vote for each alternative as opposed to only one alternative under a simple plurality voting scheme. The alternative that receives the most votes “wins”. Thus, approval voting relies on plurality voting to determine the outcome. There is nothing terribly novel about approval voting. In fact, the SEC’s current proxy rules mandate approval voting in the election of directors because Rule 14a-4(b)(2) in effect requires that a shareholder be able to instruct the proxy holder to vote for each nominee.