Corporate Boards’ Zombie Problem Proves Persistent but Curable

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By Andrea Vittorio

So-called zombie directors are hard to eliminate.

Public company directors become zombies when they get elected without support from at least half of voting investors. Even though the number of directors losing the vote has fallen since 2015, the portion that sit on the board as zombies, rather than stepping down, has stayed pretty much the same, according to a recent Proxy Insight analysis of U.S.-listed companies.

“I think what’s happened is that some companies have gotten more responsive” and are warding off shareholder discontent before votes are even cast, said Ken Bertsch, executive director of the Council of Institutional Investors, whose members manage trillions of dollars in assets. Others are “more resistant,” he told Bloomberg Law.

The council has for years pressured companies with zombie directors to adopt standards requiring board members to receive a majority of votes to be elected. Otherwise, directors only have to get more votes than a competing candidate. So if they run unopposed, they only need one vote to be elected.

Directors are now held to a majority-vote standard at nine in 10 companies in the S&P 500 index, but only about three in every 10 Russell 2000 companies, data from FactSet show.

Zombies Curable

Proxy Insight, which provides data and analysis on shareholder voting, said poor attendance and a lack of independence are the most common reasons that directors like Barnes & Noble Inc.’s Mark Carleton and Netflix Inc.’s Richard Barton fail to get backing from a majority of shareholders.

“It’s hard to understand how a self-respecting director who gets less than 50 percent support would continue to serve on the board,” Bertsch said.

More boards are adopting policies for these directors to resign, executive search firm Spencer Stuart’s latest annual report on S&P 500 companies found. Still, boards can choose not to accept a director’s resignation, the report said.

The company could decide to “cure the cause” of the negative vote instead, said John Ferguson, a senior partner at Saratoga Proxy Consulting LLC, which helps companies identify and communicate with shareholders.

“Most of the majority votes against directors are in some way related to a corporate governance issue,” Ferguson told Bloomberg Law. “A lot of those issues are curable by the board.”

For the Barnes & Noble director, the issue was attendance. A spokeswoman for the bookseller said Carleton, “a valued board member,” missed meetings due to “extensive international travel” for his job at Liberty Media Corp. Now that he’s in a new role at Liberty, Carleton is expected to have more time for Barnes & Noble board meetings, she said.

Netflix didn’t return a request for comment.

To contact the reporter on this story: Andrea Vittorio in Washington at avittorio@bloomberglaw.com

To contact the editor responsible for this story: Yin Wilczek at ywilczek@bloomberglaw.com

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