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 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. There’s 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 shouldn’t come at the cost of the company’s growth and direction.
References for Staggered Board (Classified Board)
Academic Research on Staggered Board (Classified Board)
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 Board’s 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.