Government watchdogs panic as ‘zombies’ stalk US boardrooms

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Darren Walker, head of the $16 billion Ford Foundation, has been one of the world’s biggest philanthropists for more than a decade. He dated US presidents and Elton John.

He’s also a zombie.

In August, Walker failed to win majority shareholder support for re-election at clothing company Ralph Lauren, where he had been a board director for four years. He remains on the board.

That number of votes added Walker to a dubious list of “zombie” board members — people who have failed to win at least 50 percent support from shareholders and yet remain at the top of their company’s table. At the end of August, there were 35 zombie CEOs at 27 U.S. Russell 3000 companies, according to the Council of Institutional Investors, a lobbying group for pension funds.

Although this is down from 41 last year and the phenomenon is largely confined to the US, the issue has angered investors who fear a global weakening of shareholder rights.

In the UK, the Financial Conduct Authority this year gave companies new power to adopt dual-class share structures, which give special powers to select shareholders. Also this year, Italy’s right-wing government, keen to boost domestic capital markets, proposed changes to board director voting that were attacked by investors.

“My view is that the 50 percent threshold when it comes to director elections is not a huge ask,” said Donna Anderson, global head of corporate governance at TRowePrice, which manages $1.6 billion. “It should be pretty hard to keep your seat if more than 50% of shareholders vote against it.”

“It’s so fundamental,” she said. “It’s the principle of the thing.”

Vanguard, the world’s second-largest money manager, said “zombie directors can be indicators of poor shareholder accountability.”

“We regard them as a serious governance issue,” a spokesman said. “If a board chooses to retain a zombie director, we believe it is critical that they provide clear disclosures to investors about the rationale.”

Walker received just 47 percent support from Ralph Lauren shareholders at the company’s annual meeting on Aug. 1. In a regulatory filing, the company said it believed the low vote was due to its two-class structure, “and not because of any specific objection to Mr. Walker.”

In a statement to the Financial Times, New York-based Ralph Lauren said Walker “has been a valuable and additive member” of the board.

“We remain confident in the value he brings to the company and look forward to his continued service on our board,” the statement said. The Ford Foundation declined to comment.

Other companies with zombie director votes this year include AO Smith, which makes water heaters, Veeva Systems, a cloud computing company, and the parent company of the Samuel Adams beer brand.

While asset managers’ grievances about governance have been brushed aside year after year, companies harboring zombie executives haven’t shunned bellicose activist investors so easily.

Elanco, Bayer’s former animal health unit, had two directors receive less than 50% support in 2022 and 2023. This year activist Ancora attacked the company and demanded board seats, arguing that its board used “shareholder unfriendly policies”. . In April, Ancora won two board seats at Elanco.

Most of the world’s major stock markets require a majority of shareholders to support a director in an election, which means zombies cannot exist. But in the US, state law allows for board elections, which essentially guarantees that someone can stay on a board indefinitely unless challenged.

“Because the US has somewhat looser governance rules,” governments in Britain and Italy are considering loosening their corporate governance rules to attract more corporate listings, said Jen Sisson, executive director of the International Corporate Governance Network , which represents BlackRock, Vanguard and other companies. large asset managers.

“And that’s where investors are advocating so strongly to keep those standards high, because we don’t want a race to the bottom of standards,” she said.

“Government is one of those things that is very boring until something goes wrong.”