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Corporate governance: The curse of zombies in the boardroom

Corporate governance advocates call them, rudely but appropriately, "zombie directors."

They are the members of corporate boards who fail to get the support of the majority of shareholders in annual elections, yet continue to serve, seemingly against the shareholders' wishes.

It is a growing problem, both in Canada and the United States. And it seems Canada is making more progress than the U.S. in solving it.

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First, some background: As a matter of Canadian corporate law, uncontested elections for directors are conducted on a "plurality" basis. Shareholders vote "for" a director, or they "withhold" the vote. In theory, a director can win re-election with just one vote "for" even if all the other shares are "withheld."

"Majority voting" policies, by contrast, require directors to get more "for" votes than "withheld." And those directors who don't? Most current majority-voting policies require the directors to submit their resignations.

Whether the board accepts those resignations, however, is another matter entirely.

There have been examples this year in the United States of directors who failed to get a majority vote, resigned as per the company's policy, then found themselves immediately welcomed back by their fellow directors.

CommonWealth REIT, a $2.7-billion market-cap real estate investment trust, immediately reappointed a resigning director because the board "determined that [his] continued service would be in the company's best interest."

The $4.4-billion market-cap energy company Nabors Industries Ltd. saw two board members resign, but its board decided it "would not be in the Company's best interests" to accept the resignations.

Canadians would be too polite to do such a thing? Well, no.

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Banro Corp., a miner with a market capitalization of $220-million, instituted a majority voting policy on May 31. Directors failing to get a majority "will be considered by the board not to have received the support of the shareholders." The subsequent resignation is to be accepted, the company says, "except in special circumstances that would warrant the continued service of the director."

Whoops. Within a month, Arnold T. Kondrat, a founder of the company, and Richard Lachcik, a member of the board's compensation committee, had roughly 60 per cent of the votes withheld from their re-election. And two weeks later, Banro said simply "the board of directors of the Company has determined to not accept the resignation[s]."

Banro spokeswoman Naomi Nemeth says the vote results came because proxy-advisory services opposed the two because the company is giving Mr. Kondrat, who has the title of executive-vice president, bonuses and stock options.

"In our case," she says, "it really does not make sense" to remove Mr. Kondrat, who "is the long-term relationship manager" for officials in the Congo, where Banro operates. Mr. Lachcik, she says, "has been with the company through all the phases of development … it doesn't make sense to have him come off the board with that type of experience."

This is sufficient evidence, I suggest, that a majority-voting policy that allows companies to decide whether to accept the director's resignation isn't really a majority-voting policy at all.

I don't mean to undermine the real progress here. The Canadian Coalition for Good Governance has been pressing majority voting since 2006, when few Canadian public companies had it. Today, more than 80 per cent of the members of the S&P/TSX composite index have adopted such policies, the CCGG says.

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The Toronto Stock Exchange is now proposing to make majority voting policies a requirement for listing. It's unclear, though, whether it will apply to all sizes of companies, on down to the Venture Exchange. It's possible the rule will be implemented by the end of this year.

That's ahead of the U.S., where the Council of Institutional Investors, a group similar to CCGG, requested just last month that the U.S. exchanges propose such a rule.

The CCGG, aware of the perils of letting boards accept or reject the resignations, says in its model majority-voting policy that the board should reject the resignation only under "extraordinary circumstances." For example, the company shouldn't violate other listing requirements for say, the number of independent directors, by immediately removing the director. The TSX says a non-binding resignation policy is intended to avoid these situations, not to allow the companies to ignore the voting results.

Unfortunately, it seems many companies will do just that. CCGG would like, ultimately, to make majority director voting part of the Canada Business Corporations Act. If that effort succeeds, companies should be given as little discretion as possible to retain directors who lose the vote. Zombies are for the movies, not for Canada's corporations.

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About the Author
Business and investing reporter and columnist

A business journalist since 1994, David Milstead began writing for The Globe and Mail in 2009. During eight years at the Rocky Mountain News in Denver, Colo., he individually or jointly won nine national awards from SABEW, the Society of American Business Editors and Writers. He has also worked at the Wall Street Journal. More

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