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Zombie invasion stalks US boardrooms

Corporate governance

Zombie invasion stalks US boardrooms

Companies are increasingly defying shareholder votes against board members

Only about 15 per cent of US companies have standards to force out directors if they lose support of shareholders © James Ferguson/Financial Times

US companies such as Netflix are increasingly defying votes from shareholders to remove directors from their boards, which critics say points to lax corporate governance rules in the US versus other developed markets.

Four years ago, 40 people at Russell 3000 companies continued to serve in board director roles after a majority of shareholders voted against them. This year, 54 board members are considered “zombie” directors — individuals who have failed to win majority support from investors, according to a report by MSCI based on 2,313 companies. In 2019, the zombie total was 53 in the Russell 3000 index, according to the Council of Institutional Investors, the highest level since at least 2014.

The numbers of zombie directors tend to increase with strong stock market performance, said Ric Marshall, executive director of MSCI’s environmental, social and governance (ESG) research.

Zombie directors are “red flags for investors to dig a little further into these companies,” Mr Marshall said.

It is rare for board directors to draw even the slightest shareholder disapproval. Of the 2,300 companies and 21,640 directors MSCI studied, the average shareholder support last year was 95 per cent. MSCI flags as problematic directors who receive less than 90 per cent support.

But directors can withstand losing majority support votes because only about 15 per cent of US companies have immediate and binding resignation standards if someone loses a majority vote, MSCI said. Typically, companies allow directors running unopposed to stay on the board even if they receive only one vote in favour, or firms will allow for nonbinding director votes. Such practices are rare in other developed markets.

“This is one of the areas where the US market lags the rest of the world,” Mr Marshall said of shareholder rights.

Only one S&P 500 company had a director lose a majority vote this year: Netflix. The entertainment company’s lead director, Jay Hoag, received just 45.2 per cent investor support. In 2019, all four of the company’s nominees received majority “no” votes, including Susan Rice, a national security adviser for president Barack Obama.

Netflix is one of the rare US companies that does not have an annual election for all board members. This “classified” board set up was a common defence against activist investors, but has recently fallen out of favour. Only 10 per cent of S&P 500 companies have classified boards.

Zombie directors can hurt a company’s overall ESG appeal. MSCI gives Netflix a B rating for ESG and considers the company a laggard among 76 firms in the media and entertainment industry. 

A spokesman for the Los Gatos, California-based Netflix declined to comment. Its share price hit an all-time high this year as the pandemic increased demand for at-home entertainment and the company has been one of the best-performing US stocks over the past 10 years.

Other companies with a zombie director this year include Palo Alto Networks and SS & C Technologies, MSCI said.

“The vote withheld in a director election is just a manifestation of a lack of confidence,” said Matteo Tonello, managing director at The Conference Board. Zombie directors, he said, “they are a signal of other, much more meaningful corporate governance-related issues.”

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