- Shareholders have voted against board members for years
- ‘Zombie directors’ stay after receiving less than 50% support
Investors in Nabors Industries Ltd. have a few concerns about how the world’s largest land drilling contractor is run, but they don’t seem to be able to do much about it.
Complaints range from how Nabors pays executives, to a lack of diversity on its board of directors, to how it communicates with owners, according to the company’s own autopsy, filed Monday. In a signal of disapproval, a majority of shareholders voted to oust three directors in a June 7 election, and the directors tendered their resignations.
They’ll be keeping their jobs.
Shareholders have withheld a majority of votes from director John Yearwood at the company’s last four annual meetings. The responsibility to accept his resignation would normally lie with Nabors’ governance and nominating committee. Who heads up that committee? Yearwood does. Who are the committee’s other members? Mike Linn and Howard Wolf, the other two who were voted out.
To avoid having the three decide on their own resignations, Nabors’ board created a specially appointed governance and nominating committee with other directors, and that panel suggested they stay on. The board then voted unanimously to reject the resignations and overrule the tally, according to the filing. It’s the fourth-year in a row that the board has used such a tactic to thwart the will of owners.
Nabors, based in Hamilton, Bermuda, has a “long-standing history of inadequately responding to, or totally disregarding majority shareholder votes,” Dieter Waizenegger, executive director of CtW Investment Group wrote to investors before the vote. “This includes persistently re-nominating directors who have previously been rejected by shareholders and refusing to adopt majority supported governance reforms.”
The oil-service provider’s board “considered the current structure and needs of the board, the company’s current strategic needs, shareholders’ expressed reasons for withholding votes, actual vote counts and the contributions and anticipated roles,” of the three directors, Nabors said in a filing. Denny Smith and William Conroy, spokesmen for Nabors, didn’t return requests for comment.
Whether or not a majority vote actually means what it sounds like, it all comes down to a company’s bylaws, said Fabrizio Ferri, an associate professor at Columbia Business School who has researched director elections. Boards whose shareholder votes are binding tend to be more responsive because their seats are at risk, he said.
So-called “zombie directors,” a reference to shambling undead monsters, are fairly common in instances where investors try to oust board members without offering replacements, according to the Council of Institutional Investors. While only 43 directors of companies in the Russell 3000 Index failed to win majorities last year, 38 of them stuck around, the nonprofit’s data show.
Yet Nabors’ feud with investors is unique in how long it’s lasted. Most companies typically make changes after a majority of owners signal disapproval. Nabors is among a small subset of companies that have done little to assuage shareholders over the course of years on issues ranging from directors to executive pay.
In many cases, investors will vote against directors because of broader concerns that aren’t necessarily about that person, and votes for those directors can change if underlying governance issues are addressed, Ferri said.
‘Failure to Respond’
Institutional Shareholder Services, a proxy advisory firm, recommended that investors vote against all of Nabors’ directors at the June 7 meeting “due to the failure of the board to fully implement two shareholder proposals which had received majority support of votes cast” last year, “marking yet another year of failure to respond to concerns expressed by the broad swath of shareholders.”
One of those proposals could help solve shareholders’ director problem. The proxy access measure calls for giving the right to investors who own at least 3 percent of shares for three years to be able to nominate board candidates to vie for spots occupied by the incumbents. The company’s current policy “contains restrictions virtually unseen” in the S&P 500 Index and Russell 3000, ISS said.
In six votes on Nabors’ executive compensation plans, investors have shown majority approval only once, in 2015, when the company cut compensation for Chairman and Chief Executive Officer Anthony Petrello, whose $68 million pay package in 2013 made him one of the highest-paid bosses in the oil and gas industry that year.
In Friday’s vote, the company failed to get support for last year’s compensation plan after Petrello’s pay nearly doubled to a company-reported $27.7 million from $14.8 million thanks to a merger-related bonus. Nabors’ market value has plunged to less than $3 billion, about a third of its value two years ago, as a crude glut weighs on shares of oil companies.
The worst crude market crash in a generation has forced exploration companies to slash more than $100 billion in spending last year, with more cuts coming this year. The number of rigs operating around the world has fallen by nearly two-thirds since late 2014, according to Baker Hughes Inc. And the tumbling rig count has taken a toll on Nabors’ profit margins as it’s been forced to give pricing concessions to key customers.
Investors are typically happy to leave pay decisions to boards. Companies in the S&P 500 index, which included Nabors until March, garner an average 91 percent support. Among large U.S. firms, only Tutor Perini Corp., a family-run general contractor, has a worse record on the issue than Nabors -- investors have never supported its pay practices. Had Nabors remained in the index, it would be one of only three companies whose boards are still entirely comprised of white men, according to CtW, which also points out that most of the directors are based in Houston, where the main office for operations is located.
“This is a board running on fumes,” said CtW’s Emma Bayes, “They came up with every excuse under the sun to keep these directors.”