“Zombie Directors”

The Illusory Rights of Shareholders

Does shareholder democracy really matter? The ability to vote board members in or out of office doesn’t ignite the imagination of many, except possibly those trying to take over a business. Even then, voter apathy is considerable.

But inactive or complicit boards are real problem. Among those who follow corporations, it is an important index of their health and responsiveness. Just as CEO’s who lose money should not be rewarded with big bonuses, they argue, board members who repeatedly rubber stamp management choices shouldn’t get reelected.

James B. Stewart, writing in The New York Times, recently called attention to how surprisingly shareholder elections are thwarted by management: In “41 . . . publicly traded companies . . . directors actually lost their elections last year, meaning that more than 50 percent of the shareholders withheld their votes of approval. Yet despite these resounding votes of no confidence, they remained in their posts.”

Stewart continued: “A list of companies retaining directors who were rejected by shareholders in 2012 — so-called zombie directors — was compiled by the Council of Institutional Investors, which represents pension funds, endowments and other large investors. The list includes not just smaller, family-controlled companies, where disdain for shareholder views may be more ingrained, but also Loral Space & Communications, Mentor Graphics, Boston Beer Company, and Vornado Realty Trust.” (See, “When Shareholder Democracy Is Sham Democracy.”)

On the other hand, The Wall Street Journal, noted: “One of the highest-paid corporate executives in the country lost his job Friday, as investors at Occidental Petroleum made Executive Chairman Ray Irani the latest victim of a rising wave of shareholder activism.”
“It’s a pretty amazing thing,” said “the head of the Weinberg Center for Corporate Governance at the University of Delaware’s business school,” adding that it “happens very rarely, particularly for a company of this size and reputation.”

The Journal concluded: “Activist investors once seen as fringe players are winning the backing of mainstream shareholders such as mutual funds that had long deferred to companies’ managements. Investment bankers are busier than ever advising corporate boards on how to contend with activists or ward them off.”

Most investors have minor stakes and few votes in the businesses in which they invest, of course, but successful “activists” manage to engage retirement funds and mutual funds in their cause. With billions of dollars of investments they actually do have clout. (See, “Investors Push Out Oil Boss.”)

Some years ago, a similar movement protested corporations that did business in South Africa when arpartheid was in force. That movement worried banks and investment firms as it posed a serious conflict between profit and social conscience. In the end, South Africa was a small enough source of investments so that many activists could be appeased.

But this tide of activism represents no such conflict. Investors are getting more vigilant about getting good returns on their investments, curbing the excessive compensation of managers.

The entrenched and privileged old guard are trying to stave off new investors who now wave the flag of “democracy.” As a result stakeholder democracy may be an idea whose time has come.