Staggered Board - Explained
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Table of ContentsStaggered Board (Classified Board) DefinitionA Little More on What is a Staggered BoardAcademic Research
Staggered Board (Classified Board) Definition
A Board of Directors that is made of different classes of directors serving for different term lengths is called a Staggered Board or a Classified Board. Staggered Board elections are held annually to elect, re-elect, or fill in vacancies, for the different classes of directors, by shareholder voting. Directors are commonly elected for term sizes of one, three, or five years.
A Little More on What is a Staggered Board
A staggered board is an assemblage of board of directors in which a part of the board gets elected every year. Such an election involving a staggered board is known as a staggered election. Since a staggered board comprises various classes of directors, it is also referred to as a classified board. The fact that different classes of a staggered board go to elections every year, makes it impossible to gain absolute control over it in a single election cycle. Now let us take an instance of a firm that has 12 members of the board of directors divided into three classes (C1, C2 and C3) of four members each. Suppose, we have the following tenures for each class:
- C1 - 1 year
- C2 - 2 years
- C3 - 3 years
In the above example, it is evident that no more than a third of the total number of directors will make the transition to a subsequent year. Such an arrangement makes it extremely difficult for hostile bidders to take absolute control over the staggered board at any given point of time. This is in sharp contrast to a non-staggered board of directors that can be subjugated outright. In fact, the combination of a staggered board and another antitakeover protection instrument such as a poison pill is essentially unbeatable. There are several reputed companies that have incorporated a staggered board, one of the most notable among them being McDonalds. Staggered boards do have their share of critics who argue that in such an arrangement, board directors are typically under much lesser external pressure to uphold the ethos of management. This, they contend, adversely affects shareholder interest. Also, a staggered board acting as a poison pill can pose a threat to genuine bidders that are actually concerned with enriching shareholders. However, detractors of this theory suggest that staggered boards are a rational tool of defense against giant corporate investors looking for easy acquisitions for their own vested interests, as well as hostile bidders that seek to gain from a split-up of the business. Also, a staggered board can come across as a bargaining tool for a firm that can use it to negotiate terms to its advantage with potential acquirers. Moreover, staggered boards can potentially strengthen a firms long-term commitments with its partners by encouraging management to partake in long-term projects. However, the above advantages are speculative in nature and their impact typically relies on situational factors.
A public company's annual proxy materials contain the Board of Directors statement, composition, and corporate governance policies. Staggered Board proponents favour it over traditional boards due mainly to:
- Board Continuity - Smoother transition between incoming and outgoing members.
- Anti takeover provisions - Staggered Boards are more immune to hostile takeovers than traditional boards.
Staggered Board critics cite the following reasons as its disadvantages:
- Less Board accountability to shareholders.
- It creates a fraternity of Board members more loyal to each other and their interests than the interests of the company and shareholders.
A Harvard University study published in the Stanford Law Review posits that 70% of the companies going public in 2001 had a Staggered Board structure. However, it also found that shareholders returns diminished significantly over time when the company had a Staggered Board structure as opposed to those with traditionally elected Boards, especially in the event of a hostile takeover. Taking over a Staggered Board poses multiple hurdles for shareholders. Theres a minimum wait period of one year for the next elections to be held. Also, shareholders need two seats on the Staggered Board and hence need to wait some more for another member to get elected and gain board control. Hostile bidders with a single seat on the Board let it use poison pill tactics to stall the takeover. Hostile takeovers of Staggered Boards are sometimes beneficial to shareholders as hostile bidders are more likely to offer premium prices for their shares after a hostile bid. The Harvard study also found that share prices of companies with Staggered Boards, increased by 31.8%, within three quarters of a hostile takeover bid announcement, much less in comparison with the 43.4% average increase in prices of companies that had regular Boards. Staggered Boards sometimes serve interests that are distinct from shareholders and the company and hence not the most ideal Board structure set up. Even if they safeguard against hostile takeovers, their goals are at odds with shareholders. Although Board continuity is important, it shouldnt come at the cost of the company's growth and direction.
Classified boards, firm value, and managerial entrenchment, Faleye, O. (2007). Journal of Financial Economics, 83(2), 501-529. This paper takes a very critical view of Staggered Boards and posits that they destroy value and reduce effectiveness of directors. Classified boards and firm value, Frakes, M. D. (2007). Del. J. CorP. l., 32, 113. This paper examines the relationship between Classified Boards and the value of the firms they manage. The differential effects of classified boards on firm value, Ahn, S., & Shrestha, K. (2013). Journal of Banking & Finance, 37(11), 3993-4013. This paper studies a Classified Boards differential impact on the value of a firm. Corporate governance and firm cash holdings in the US, Harford, J., Mansi, S. A., & Maxwell, W. F. (2008). Journal of financial economics, 87(3), 535-555. This study explores the relationship between corporate governance structures and cash reserves in the U.S and concludes that corporates with weak managements have poor cash reserves. Thirty years of shareholder rights and firm value, Cremers, M., & Ferrell, A. (2014). The Journal of Finance, 69(3), 1167-1196. This study analyses the relationship between shareholder rights and the value of a firm based on data obtained from 1000 firms in an 30 year duration between 1978 to 1989 in conjunction with data from 1990 to 2006. Cumulative voting: The value of minority shareholder voting rights, Bhagat, S., & Brickley, J. A. (1984). The Journal of Law and Economics, 27(2), 339-365. This paper explores the impact of minority shareholders voting rights in a cumulative voting scenario. Corporate governance, shareholder rights and firm diversification: An empirical analysis, Jiraporn, P., Kim, Y. S., Davidson, W. N., & Singh, M. (2006). Journal of Banking & Finance, 30(3), 947-963. This paper studies the impact of shareholder rights on firm diversification and the value it brings to the firm. Corporate governance and firm performance, Bhagat, S., & Bolton, B. (2008). Journal of corporate finance, 14(3), 257-273. This paper attempts to answer the questions of how to measure corporate governance and what is its impact on the performance of a firm. CEO involvement in the selection of new board members: An empirical analysis, Shivdasani, A., & Yermack, D. (1999). The journal of finance, 54(5), 1829-1853. This paper examines the relationship between selection of new board members influenced by the involvement of the CEO, based on empirical analysis. Corporate governance, board diversity, and firm value, Carter, D. A., Simkins, B. J., & Simpson, W. G. (2003). Financial review, 38(1), 33-53. This paper studies the impact of a diverse Board on the value of a firm and corporate governance. Classified boards, the cost of debt, and firm performance, Chen, D. (2012). Journal of Banking & Finance, 36(12), 3346-3365. This paper studies the impact of Classified Boards on the cost of debt of a firm and its value, suggesting that debt value is significantly reduced when the Board structure is Staggered. Corporate governance practices, CEO characteristics and firm performance, Nelson, J. (2005). Journal of Corporate Finance, 11(1-2), 197-228. This paper explores the link between corporate governance practices, performance of a firm, and the characteristics of its CEO, and traces the evolution of management practices over the years. The uncertain relationship between board composition and firm performance, Bhagat, S., & Black, B. (1999). The Business Lawyer, 921-963. This paper sheds light on the precarious relationship between performance of a firm and the composition of its board.