More Blood in the Water? ServiceSource’s Board Ignores Vote to Oust Two Directors

It’s not unusual for investors to voice frustration after losing money in a poorly-performing stock. It is out of the ordinary when a board of directors ignores the way those investors vote their shares.

Consider the case of ServiceSource International, which last month failed to receive majority support at its annual meeting for two directors who ran unopposed: Bruce Dunlevie and Thomas Mendoza. As procedure required, the two directors tendered resignations. But rather than accept the resignations, the board prepared a rationalization for why it was keeping the directors.

The company, which announced the decision quietly in an SEC filing rather than a press release, essentially said it believed the two men were highly qualified, citing their experience, knowledge, and industry connections, among other factors.

Indeed Messrs. Dunlevie and Mendoza have some solid credentials. Mr. Dunlevie is a General Partner of Benchmark Capital, a prominent venture capital firm and one of the company’s largest shareholders. Mr. Mendoza, meanwhile, is Vice Chairman of NetApp, one of ServiceSource’s clients.

But the board of directors almost always needs to put shareholders’ will first. “The board is basically saying ‘we are ignoring a majority of shareholders who voted and we will listen to the silent minority,’” says Lawrence Elbaum, Partner at Vinson & Elkins and a corporate governance specialist. “Technically, the board has a fiduciary duty. It can’t think about its own interests. They had to believe the two directors were so valuable it would be a breach of their duty to accept their resignations.”

The company declined to comment through a spokesman while Mr. Dunlevie’s office at Benchmark didn’t respond to a voicemail and NetApp didn’t respond to an email seeking to reach Mr. Mendoza.

What drove so many shareholders to vote against Messrs. Dunlevie and Mendoza? The most likely reason is that both leading proxy advisors, ISS and Glass Lewis, recommended it – and many large investors took their advice.

In its voting recommendation report, ISS said its recommendations against the two directors, who comprise the compensation committee, were warranted given the near failure of last year’s so-called say-on-pay proposal, which lets shareholders weigh in on how much senior executives are paid. “Votes against the company’s say-on-pay and the company’s compensation committee are warranted, in light of the inadequate response to near-failing support for the 2018 say-on-pay proposal. Moreover, the shift from performance-conditioned long-term awards underscores the current pay-for- performance misalignment,” the ISS report said.

Glass Lewis recommended a vote against the two directors for similar reasons. “In our view, the members of the compensation committee have the responsibility of reviewing all aspects of the compensation program for the Company’s executive officers. It appears to us that members of this committee may not be effectively serving shareholders in this regard,” the Glass Lewis report said.

One could argue that Mr. Dunlevie deserves more time to prove himself in his new committee role. After all, he was only named a member of the compensation committee last November.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Glass Lewis, through a spokesman, acknowledged to CorpGov that it had actually considered an endorsement of Mr. Dunlevie because he had been on the compensation committee for a short time (and it left some text to that effect in its report). But its ultimate decision was to recommend a vote against him. &nbsp;“Our report contained erroneous text that contemplated an exception to our policy,” the spokesman said. “We’ve corrected the analysis to remove this errant text, but there were no changes to our voting recommendations. We continue to recommend that shareholders vote against both compensation committee members based on ongoing compensation concerns.”” data-reactid=”29″>Glass Lewis, through a spokesman, acknowledged to CorpGov that it had actually considered an endorsement of Mr. Dunlevie because he had been on the compensation committee for a short time (and it left some text to that effect in its report). But its ultimate decision was to recommend a vote against him.  “Our report contained erroneous text that contemplated an exception to our policy,” the spokesman said. “We’ve corrected the analysis to remove this errant text, but there were no changes to our voting recommendations. We continue to recommend that shareholders vote against both compensation committee members based on ongoing compensation concerns.”

The company also reshuffled its executive suite at the end of last year, replacing the CEO, CFO, and COO in November and December. That could make for an argument to keep the new executives around for a while to see how they perform.