IN-DEPTH: Investors see red as boards cling to 'zombie' directors
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Nearly 150 directors failed to win majority support but remained on the board of U.S.-listed companies regardless over the past four years, with boards keen to retain final say over the mix of expertise and experience needed to drive performance.
Some 147 directors remained on boards after receiving less than 50% support in at least one annual meeting between July 1, 2020, and June 30, 2024, according to Diligent Market Intelligence (DMI) data.
The issue is more prominent at smaller companies, with 36 such directors retaining their seat at Russell 3000 companies in the last proxy season and just five having departed, compared to two directors that were kept on at S&P 500 companies.
However, the continued presence of such so-called "zombie" directors is seen as a red flag by many investors who feel that their voices aren’t being taken into consideration, as Alliance Advisors Managing Director Etelvina Martinez told DMI in an interview. “Some investors have policies to vote against certain director nominees, often nominating committee members, if a board proposes the reappointment of a director that failed to receive support from at least a majority of shareholders.”
Addressing shareholder concern
Most S&P 500 companies have a traditional form of majority voting, although this is not the case for many featured in the Russell 3000. According to DMI data, 1,347 Russell 3000 companies have a majority vote standard for uncontested elections.
Even if a majority of investors fail to support a director, boards can still retain the final say on whether they keep their position but should communicate their rationale.
“Boards usually argue that they’re acting in line with their fiduciary duty because the director’s resignation would not be in the best interests of shareholders, despite what they expressed with their votes,” said Ele Klein, co-chair of Schulte, Roth & Zabel’s (SRZ) Global Shareholder Activism Group. “The idea is that the board knows better than investors and there is some degree of truth in that. If shareholders say they don’t like a director, but the board knows it can’t get anyone better at the moment, then they’re not going to swap for a worse candidate.”
Vanguard has described the presence of a zombie director on a board as "an indicator of weak shareholder accountability." The asset manager highlighted the importance of responding to shareholder concerns around the issue when it shared its voting rationale for backing all the nominating and governance committee members on the ballot at the 2024 annual meeting of U.S.-based Keros Therapeutics. "If a board chooses to retain a zombie director, we look for the board to provide clear disclosure to investors regarding the rationale," Vanguard explained.
Keros responded to investor concerns around one director's commitments by revealing that steps had been taken to reduce his number of public company directorships while also stressing that his industry experience was viewed as “critical for the board’s composition.” In its own proxy guidelines, BlackRock said that its funds would vote against the chair of the nominating and governance committee where board members at the most recent meeting were opposed by more than 25% of the votes cast and the board has not taken “appropriate action to respond to shareholder concerns.”
Understanding dissent
Understanding the nuance behind such opposition votes is considered crucial for boards in managing investor expectations to improve support levels at subsequent AGMs, with companies that are seen to have ignored shareholder concerns over board composition potentially opening themselves up to increased risk including a potential proxy fight.
“Serial offenders, in terms of ignoring shareholder feedback, may damage their reputation among investors and run an increased risk of activists honing in,” Martinez said.
Such perceived disregard for shareholder feedback can also be referenced by proxy voting advisors with certain board roles particularly exposed, as Klein explains. "Glass Lewis and Institutional Shareholder Services tend to recommend a negative vote in the following meeting and may recommend a vote against the nominating and governance committee as well.”
To offset such risk, boards are advised to decipher whether the problem is something specific to the individual director, such as overboarding or poor meeting attendance, or whether it is a broader issue that the director merely took the fall for, such as dual class stock or a classified board structure.
If a company wants to reverse the downward trend in support, Klein argued that they need to make a concerted effort to establish a record of good-faith engagement with their investors, a sentiment shared by Martinez who said that year-round engagement is crucial for understanding investor concerns.
“In this kind of engagement, boards need to explain their position but be mostly in listening mode to understand what the investors' concerns are. If the underlying issue driving director opposition is something that the company is not ready to change right now, then they’ll need to provide a really solid explanation why,” she concluded.
