Zombie Directors and Board Accountability
After a decade-long campaign by investors, nearly 93% of companies in the S&P 500 now either provide for the election of directors by a simple majority vote or require directors to submit a resignation if they fail to win a majority of votes cast. In conjunction with the decline of classified boards – about three-quarters of the S&P 500 now provide for the annual election of directors – shareholders can now hold directors accountable and remove them from the board if they fail to properly represent shareholder interests.
Or at least that’s the theory. In practice, it is much, much harder for shareholders to remove directors in an uncontested election. Since 2011, at least 121 directors have failed to gain a majority of votes cast by shareholders at 75 different companies and yet remain on their boards. Some of them have failed multiple times, such as at Healthcare Services Group, Inc., where nine different directors have failed to receive a majority since 2011, including one director, Theodore Wahl, who has lost three out of the last four elections. All remain active members of the board. In this case, Healthcare Services Group has a plurality election standard, where a single vote in an uncontested election is sufficient to return a director to the board.
More disturbingly, a significant portion of these directors who remain on boards after losing their vote serve at companies with either a majority vote standard or a plurality vote standard where the director is required to submit a resignation when he or she fails to receive a majority. At Nabors Industries, which has a director resignation policy, the board refused to accept the resignations of the three directors who failed to receive a majority in 2014 (after doing the same in 2013). Similarly, at Big Lots in 2013, Russell Solt was opposed by a majority and tendered his resignation, yet he remains on the board of directors (and was re-elected in 2014).
Even at companies where directors are no longer serving after losing their elections, there is often a significant delay before they leave the board. Of 47 cases of directors who no longer serve after failing to receive majority support in the past three years, in only 18 cases did the director leave within a year. For instance, after Morris Goldfarb at Christopher & Banks received 47% support at the 2011 annual meeting, he did not leave until June 2013. Few and far between are cases where a director departs directly after the annual meeting, such as at Sterling Construction, where director Robert Eckels received only 42% support and immediately tendered his resignation, which was accepted by the board.
The willingness of companies to maintain plurality voting (where one vote suffices for re-election), to reject resignations from directors who fail to receive majority support, and to re-nominate these directors to the board in following years, reflects a fundamental rupture in the chain of board accountability. This rupture is, unfortunately, abetted in part by shareholders, who have shown themselves willing to reject a director one year and re-elect him or her the next, and who have not typically held nominating committees or the broader board accountable for keeping these zombie directors on boards. One possible path forward: broader access to the proxy for shareholders, to help make more elections contested, eliminate the plurality vote loophole, and provide an affirmative alternative for shareholders. Without a choice, especially in these cases where shareholders are expressing significant discontent, accountability is weakened.