You Can’t Shoot Zombie Directors!

Recently, investor advocacy groups have focused on so-called “zombie directors” – directors of public companies who are elected despite failing to garner a majority of stockholders’ votes in uncontested elections.  CalPERS recently identified 52 directors who failed to win shareholder votes but either stayed in place or subsequently were reinstated. 

Corporate laws across most states, including Delaware, generally adhere to “plurality voting,” which provides that a director receiving the most “for” votes will be elected as a director.  As a result, in an uncontested election, a director receiving just one vote would be elected even though the balance of the votes was withheld.

In recent years, various corporate governance and stockholder advocacy groups have pushed for “majority voting” for directors to make boards accountable to investors.  Majority voting generally provides that, in uncontested elections, a director nominee must receive more “for” votes than “withhold” votes (or if permitted, “against” votes) to be elected. 

The Council of Institutional Investors’ corporate governance policies state that in uncontested elections, directors should be elected by majority vote; directors who fail to receive majority support should step down from the board and not be reappointed.  According to the Council, while more than 70 percent of companies in the Standard & Poor’s 500 Index use the majority vote standard for uncontested board elections, thousands of U.S. companies still use plurality voting.  Further, the Council has noted that some companies that have embraced majority voting for directors give their boards discretion to overrule stockholders and reappoint incumbent directors who fall short of majority support in uncontested elections.

If your company has a majority voting requirement, one way to ensure that you do not have zombie directors is to institute a board policy to the effect that board nominees must submit an irrevocable resignation in advance that will become effective upon the failure of that nominee to receive a majority of votes in an uncontested election.  Such a resignation is now expressly permitted under Delaware corporate law.

But be careful of what you wish for – one unintended consequence of a majority voting requirement coupled with an advance resignation provision is that you may be left with an understaffed board.  For example, a company with a majority voting requirement runs a risk that, in an uncontested election, it may not have a sufficient number of independent directors if either a proxy advisory firm, such as ISS, or a group of dissident stockholders, wages a successful “withhold” vote campaign against some or all of the incumbent board (perhaps due to dissatisfaction with the company’s executive compensation policies).  As a result, a company may be left without a sufficient number of independent directors to satisfy stock exchange listing requirements. 

At the end of the day, in some cases, a zombie director may be better than no director!

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