It didn’t work in Washington, but some companies continue to believe that ignoring the outcome of a vote might be acceptable on Wall Street.
The latest unfortunate example is Enzo Biochem, Inc., a company founded in the 1970s that has frustrated investors with a poor operational and share-price performance over the last several years. Shareholders told the company they’d had enough earlier this month, when Chairman Elazar Rabbani, Ph.D. failed to get majority support – garnering just 44% of shares voted (a fifth of the total share count) at this year’s annual meeting.
Dr. Rabbani, who has been with the company since it was founded, did what he had to do: Submit a letter of resignation. And yet, he still holds his seat because the board of directors refuses to accept it. By all indications, the board intends to ignore the will of shareholders and essentially stage a coup. Enzo didn’t respond to a request for comment from CorpGov.
Corporate governance experts say common sense and fiduciary duty should prevail. “They should accept his resignation,” said Charles Elson, Professor of Finance, Edgar S. Woolard, Jr Chair in Corporate Governance at the University of Delaware. “This is regretfully straightforward – the board works for the shareholders and needs to abide by them.”
There are several practical reasons why the board should reconsider its position. First, other boards that have tried such a stunt have quickly been disgraced. One recent example is ServiceSource International, which saw two directors voted out in 2019 but who didn’t leave: Bruce Dunlevie, a General Partner of Benchmark Capital and Thomas Mendoza, Vice Chairman of NetApp. Both men were removed the following year.
The story has been the same with others. Bed Bath & Beyond, for instance, faced a similar situation in 2018 when Victoria Morrison submitted her resignation after failing to win majority support. Like ServiceSource, Bed Bath & Beyond defied shareholders and kept her onboard. But in 2019, at the behest of a hedge fund consortium, the company removed several directors including Ms. Morrison.
Then there is the reputation of the directors behind the coup. It is hard to imagine them being supported by shareholders at any other company where they might seek board seats. “There will be a question raised as to their commitment to investors,” Professor Elson said. “Anyone who has seen this will take this behavior into account.”
Those directors include Mary Tagliaferri and Ian Walters, both of whom only joined the board in November. Neither Ms. Tagliaferri nor Mr. Walters responded to requests for comment from CorpGov.
Enzo should not expect shareholders to tolerate its behavior. On Friday, Roumell Asset Management, LLC filed a 13D reflecting its 5.8% stake in the company. It has also written a letter urging the company to accept Dr. Rabbani’s resignation.
Dr. Rabbani has much to be proud of, having founded the company 45 years ago and dedicating his career to it. But the company doesn’t belong to him alone. It belongs to all shareholders, including those who have seen Enzo’s shares sink to around $3, down from a recent peak above $10 a few years ago.
If Dr. Rabbani and the board cling on much longer, they will be remembered for all the wrong reasons.
John Jannarone, Editor-in-Chief