A new analysis from the Council of Institutional Investors, announced on October 31, reports a relatively high proportion of “zombie directors” remaining on corporate boards. (The date was not lost on CII: the press release was called a Halloween media advisory.) As you probably know, a “zombie director” is a director who failed to receive a majority favorable vote of shareholders but still remains on the board. CII reported that, in 2016, of the 44 directors at 27 companies in the Russell 3000 who failed to win majority support from shareholders, 40 still hold their board seats.
According to the Washington Post, about 90% of the S&P 500 have adopted majority voting, but among the Russell 3000, slightly over half still have some type of “plurality” voting. With plurality voting, the directors receiving the most votes are elected and, as a result, in an uncontested election, a single vote in favor will elect a director. Some companies have adopted an enhanced version of plurality voting, called “plurality plus,” where directors are required to tender their resignations if they get more “withhold” than “for” votes. Here’s the hitch: the rest of the board can decide to reject the resignation, leaving the “zombie” to remain on the board.
Failing to win a majority vote is a relatively rare occurrence — the Washington Post reports that, per ISS, the average vote in favor of directors among the S&P 500 was 97% in 2016. According to CII, in the past four years, “uncontested directors in the Russell 3000 did not win majority support 164 times at 104 companies. Total rejections amounted to 195, as 22 directors failed to obtain majority support more than once. Strikingly, out of these 195 rejections, only 36 directors stepped down from their boards…. CII reports that, of directors that did not receive majority votes, only 18% actually left their board positions.” According to the Washington Post, commentators advocating that directors step down after failing to receive a majority of votes in favor contend that, unless the director is required to leave, shareholders have no way to hold the board accountable. Advocates of plurality voting believe that it promotes board continuity and can limit the power of special interests.
Because CII believes that directors who fail to win majority support in uncontested elections should resign from the board and not be reappointed, CII has, since 2010, written to the boards of Russell 3000 companies where directors did not receive majority support requesting that the affected directors step down. CII has also sent letters to Russell 3000 companies that have retained plurality voting, urging them to adopt true majority voting. As reported in the Washington Post, CII’s executive director believes that encouraging “plurality voting holdouts” to make the switch each year is “‘pretty effective….but it’s a slow process.’” Likewise, efforts so far to effect a change through legislation or regulation have not been successful. One commentator who testified before Congress observed that “lawmakers are often surprised to learn how director elections work. ‘They’re dumbfounded to hear you could continue to serve’ despite not winning a majority of votes.”” (I guess they forgot about the electoral college?)