Consensus, Super Majority, Majority: Why Voting Thresholds Matter

Consensus, Super Majority, Majority: Why Voting Thresholds Matter

by | 'Aug 17, 2017' | How-To | 0 comments

Much is being made about Senate voting thresholds in the press these days. When can the Senate act by simple majority? When must there be a super majority of 60 votes rather than 51? More relevant to our purposes: what do the sometimes-arcane voting rules of the U.S. Senate have to do with family business decision-making?

More than you might think.

Procedurally-speaking, the process by which a decision is made can have as much impact as the decision itself. When those making the decision—and those governed by it—consider the decision-making process fair, thorough, and transparent, and when everyone involved has had a chance to have their voices heard, they are more likely to honor and uphold the ultimate decision. But if an individual or subset of the group is seen by others in the group to have used the voting process to circumvent or thwart the will of another subset, then the outcome is more likely to generate conflict than reduce it.

This is especially true for family members in business together.

Business-owning families are interconnected in countless ways, and when a major decision is made in a manner that someone within the group considers unfair, the resulting discord tends to ripple through other aspects of their lives together, causing additional and long-lasting conflict that may be entirely unrelated to the original decision. The problem is that rippling waves of conflict—even from seemingly unrelated sources—can weaken the family glue enough to imperil family relationships over the long term. For many, many business-owning families, reducing the potential for long-term conflict is a worthwhile reason to invest time and attention in considering voting thresholds.

Choosing a threshold requires the group to consider the degree of gravity of the decision and the potential for discord and disagreement it may create among the members. The greater the gravity, the more important it will be for the group to come to consensus on the threshold. They don’t necessarily have to reach consensus on the decision itself—though that may be a worthy objective. At a minimum, what they will want to reach consensus on is what voting threshold they’ll agree to.

For decisions that are not controversial, it pays to stick to the standard threshold by which the group typically operates. Take, for example, a vote by the shareholders at the annual meeting to approve the auditor. If the bylaws of the business specify that the decision is to be made by majority vote, then—unless some of the owners are concerned about poor performance by the auditor, potential fraud, or some other controversial matter—this is a threshold that is likely to be accepted. (It is also a matter in which potential controversy could largely be dealt with in a call before the meeting, in which the shareholders could have the opportunity to learn more about the situation, discuss their options, hear each other’s viewpoints, and come to a general understanding before the vote actually takes place.)

It’s when the decision gets complex that thresholds really matter.

Let’s think about voting thresholds in the context of a particularly thorny issue: whether the owners should accept an unsolicited offer from a family member to buy out the other family owners of the company. Sometimes, the bylaws will already spell out a threshold—perhaps, a supermajority of 66.7% or 75%. But it is worth asking, as a group, whether that threshold is sufficient for the matter at stake, or whether the situation calls for a higher—or lower—threshold.

Generally speaking, a lower voting threshold is acceptable when the decision is of lower relative importance. A higher threshold—perhaps even unanimity—is often desirable to a family group when the decision carries with it the potential for long-term discord. But there are wrinkles to consider.

One benefit of debating the voting threshold before the vote is to be taken, is to get a chance to see how the members of the group see the decision and how they evaluate their own and others’ interests and choices. In a sense, the discussion about thresholds can be a safer, less contentious preview of how the vote itself might go, and give the group a useful perspective on the emotional dynamics of the decision.

In the complex situation we’ve posited—considering whether to accept an unsolicited offer from a family member to buy out the other family owners of the company—there would be many factors in play that might factor into the choice of a voting threshold. Here are a few:

  • Are those who would be bought out in fact interested in being bought out? If so, the risk of alienating a subgroup is lower, and the threshold may not be so critical.
  • Are the terms of the deal deemed to be fair to those who would be bought out—with fairness considered objectively (say, by a valuation and analysis by a knowledgeable third party) and subjectively (in the opinion of those who would be bought out)? If so, a lower threshold may suffice.
  • Do the affiliates of the potential buyer have enough votes on their own to reach the threshold in the bylaws? If so, and if the family bonds are strong, this may be a decision that warrants at least an effort to get to consensus—to honor the voices, concerns, and perspectives of the minority, who may cease to be owners as a result of the transaction, but will continue to be family members.

Consensus and veto power are additional wrinkles.

Where the group values relationships very highly, consensus will often be the voting threshold of choice—the group will aim to use the decision-making process to build common perspective and will seek at all costs to avoid splitting itself by alienating a member with a dissenting viewpoint. The downside of consensus can be deep conservatism—a tendency to avoid change because of the degree of education, debate, discussion, anxiety, and disruption a major decision might bring to an otherwise stable family group.

On the flip side, where the group is already split in its interests and perspectives, requiring consensus gives an individual or small group of dissenters effective veto power. If consensus is mandated by the group as a whole, the dissenters may well use their veto power to shape the deal in their own interests. This may be acceptable, or not, to the group as a whole, but the issue of veto power is worth considering. Where the decision is complex and there are dissenting factions, but overall the family group seeks to maintain or even strengthen family glue, it may be worthwhile for the group to aim for consensus, but also do some relationship-building work before it takes on the decision-making process.

Family owners facing complex decisions can mitigate damaging conflict and even strengthen family glue by discussing and agreeing on the threshold for the decision—before they undertake the decision itself.