"Corporate governance: The curse of zombies in the
boardroom" appeared in The Globe and Mail on July 24,
2013. The article described a growing phenomenon that illustrates a
weakness in corporate governance structures.
What's a Zombie Director?
So-called "zombie directors" are corporate directors
who fail to receive a majority of votes in uncontested elections
but remain in their seats. They are a consequence (certainly
unforeseen) of the adoption of majority voting policies by
corporations in response to concerns that plurality voting (the
standard Canadian corporate election mechanism) runs counter to
shareholder democracy and may lead to the entrenchment of a
One only has to Google "zombie directors". The number
of articles on the topic is now legion. The Council of
Institutional Investors, the International Corporate Governance
Network and countless corporate and governance blogs are now
calling for the removal of zombie directors from boards and urging
changes in rules to put an end to zombie directors.
Psychology Today and the Health Medicine Network have
weighed in on the issue (see, "'Zombie Directors' The Illusory Rights of
Shareholders" in Psychology Todayand
"Zombie Directors" on the Health Medicine
Network's web page). The situation must be dire!
Where Do They Come From?
Every problem has a solution; and solutions often have their
Zombie directors spawn from the implementation of majority
voting policies, heralded as the cure to the plurality voting
system. In a plurality voting system, shareholders do not have the
option to vote against a particular nominee for director; instead,
shareholders may only vote for or withhold their vote for the
individual. Withheld votes do not count and a director needs only
one "for" vote to be elected to the board. The plurality
system guarantees that every nominee director is elected. And there
lies the initial problem.
The solution: moving from a plurality voting system to a
majority voting standard through majority voting policies (and
thereby making a withheld vote meaningful).
Typically, a majority voting policy provides that a director who
receives more "withheld" votes than "for" votes
must tender his or her resignation, even though the director has
been duly elected under corporate law. Absent exceptional
circumstances, the resignation should be accepted by the board. A
majority voting policy is designed to ensure that only those
directors who receive more "for" votes than
"withheld" votes remain on a board.
The move to a majority voting standard brought its own set of
problems. Directors who fail to get a majority vote, tender their
resignation, and yet still fi nd themselves on the board of the
company. In one case, the board actually accepted the resignation
and proceeded to appoint the director who failed to get a majority
vote in order to fulfi ll the vacancy created by his resignation.
See "When Shareholder Democracy Is Sham Democracy" in
The New York Times for more examples of failings in the
application of majority voting policies.
Only half of directors ultimately step down from a board after
failing to obtain a majority of the "for" votes. The data
(mostly US) shows that zombie directors are rarely, if ever,
retained for what many might consider legitimate reasons:
compliance with securities regulations, contracts, corporate laws
or a provision of the company's governing documents. See
"The Election of Corporate Directors: What Happens When
Shareowners Withhold a Majority of Votes from Director
Nominees?", a research study conducted by GMI Ratings, and
commissioned by The Investor Responsibility Research Center
Institute, that examined the causes and eff ects of shareholder
opposition to 175 director nominees at Russell 3000 companies
between July 1, 2009 and June 30, 2012.
Getting Rid of Zombies?
So, you have a zombie director. What is to be done?
Make no mistake. Majority voting policies are better than the
reigning system of plurality voting. They give meaning to a
withheld vote by a shareholder. Surely, they improve corporate
governance. Must zombie directors be a by-product of that
improvement? Not necessarily! Recognition by boards that they
can't retain directors who serve without the support of
shareholders is required.
We recognize that the decision of whether to accept (or reject)
the resignation tendered by a director who failed to obtain a
majority of the "for" votes is a matter of the
board's fi duciary duties. However, boards should only reject
such resignations in exceptional circumstances. And when
they do so, boards should explain what those circumstances are. Too
often, say corporate governance pundits, this decision is cloaked
with the opaque shawl of the best interests of the corporation.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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Under the Income Tax Act, the Employment Insurance Act, and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions or GST.
Under the Income Tax Act, the Employment Insurance Act, the Canada Pension Plan Act and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions.
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