We noted in the last post that majority vote provisions do not, for the most, part allow shareholders to actually defeat or remove directors. Instead, they force the directors to submit a letter of resignation to the board. We noted, however, that boards have a number of reasons why they are unlikely to accept these letters of resignation.
Directors who do not receive a majority of the votes cast but remain on the board are sometimes termed "Zombie Directors." A recent analysis by the Council on Institutional Investors indicated that, in 2012, there were 41 Zombie Directors.
Zombie Directors fall into two categories: Those not receiving a majority of the votes cast at companies with a majority vote provision and those not receiving a majority of the votes cast at companies without majority vote provisions.
The difference is significant. In the latter case, there is no required letter of resignation (although the Zombie Director could voluntarily submit one). Thus, the Zombie Directors have been elected under the plurality system. Without a letter of resignation, the board is left with the default rule that it cannot remove incumbent directors.
The board is not, however, powerless. The board can decide not to renominate the Zombie Director the following year. This authority notwithstanding, companies without majority vote provisions confront the same structural concerns that militate against a decision declining to renominate. It is, therefore, likely that in most cases Zombie Directors will be renominated.
With majority vote provisions themselves providing no real authority and state law unlikely to impose meaningful standards of review on the retention of Zombie Directors, the board, at this stage, has little incentive to replace Zombie Directors. That may, however, change. The CII has compiled data in this area. Calpers has begun to look into the issue. Pressure continues on large public companies to implement majority vote provisions and at least force boards to take a position on Zombie Directors (in the post-Jobs era, Apple adopted a majority vote provision), although greater attention may need to be given to the implementation of these provisions at smaller public companies.
Pressure from investors may make it harder for boards to keep Zombie Directors in office. Nonetheless, it illustrates a profound weakness in the governance structure. Shareholders can successfully vote against directors but the act has little independent value. Only with a second, post-election campaign against the Zombie Director will shareholders likely see the decision at the ballot box implemented.