Staggered Board Definition
A staggered board of directors is a group of directors belonging to separate classes. It is also known as a classified board.
In a staggered board, directors are clustered into three, four or five distinct classes. Each class serves for a certain period of time, after which it is subjected to an election. Each such electoral period staggers the position of board director.
The role of a staggered board is indispensable during mergers and acquisitions as a tool of defense against hostile takeovers.
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 firm’s 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.
References for Staggered Boards of Directors
Academic Research on Classified Board Structure
Classified boards, firm value, and managerial entrenchment, Faleye, O. (2007). Journal of Financial Economics, 83(2), 501-529. This paper highlights the demerits of classified boards such as a reduction in the value of the firm as a consequence of management entrenchment and curtailment of director efficacy. Faleye scrutinizes management entrenchment engendered by classified boards that are predisposed with CEO turnovers, executive pay, proxy fights and shareholder proposals.
Board classification and managerial entrenchment: Evidence from the market for corporate control, Bates, T. W., Becher, D. A., & Lemmon, M. L. (2008). Journal of Financial Economics, 87(3), 656-677. The authors study several firms over a period of 12 years in order to establish a correlation between staggering of boards, takeover maneuvers, and transaction outcomes. They conclude that staggering does not affect the likelihood of a firm that is already targeted of being eventually acquired, but it does lessen the frequency of incoming takeover bids.
Board structure and price informativeness, Ferreira, D., Ferreira, M. A., & Raposo, C. C. (2011). Journal of Financial Economics, 99(3), 523-545. This paper inspects the theory that the structure of corporate boards is influenced by clarity about stock price. It concludes that there exists an inverse relationship between stock price clarity and board independence. Based on the results of several tests, the authors suggest that when businesses have more informative stock prices, their board structures typically become less demanding.
The powerful antitakeover force of staggered boards: theory, evidence and policy, Bebchuk, L. A., Coates IV, J. C., & Subramanian, G. (2002). (No. w8974). National Bureau of Economic Research. This paper recognizes staggered boards as powerful anti-takeover defense devices. Staggering thwarts takeover attempts by: Impelling hostile bidders to wait for at least a year to gain total control over the board of directors; Forcing hostile bidders to participate and win in two consecutive elections.The general estimate was that ‘effective’ staggered boards (ESBs) of hostile bid targets negatively affected shareholder returns up to 10%.
Strong boards, CEO power and bank risk-taking, Pathan, S. (2009). Journal of Banking & Finance, 33(7), 1340-1350. Pathan’s paper scrutinizes the impact of the board of directors of a bank on the risk-taking capabilities of the organization. A seven-year sample data of over 200 American bank holding companies reveals that unrestricted bank boards with strong focus on shareholder interest generally enhanced the risk-taking capabilities of their respective organizations.
Staggered boards and earnings management, Zhao, Y., & Chen, K. H. (2008). The Accounting Review, 83(5), 1347-1381. This paper theorizes that staggered boards may engender two contrasting effects on earnings management: The expropriation view highlights the exacerbating effect, while; The quiet life view accentuates the mitigating effect. The authors perform two separate tests with different sample sizes to explain the two effects: Testing the prevalence of financial reporting fraud within firms, by using small sample data. Testing the absolute value of unexpected accruals, by using large sample data. The tests revealed the following results: Firms with staggered boards are typically less susceptible to committing fraud or engaging in absolute unexpected accruals. Staggered boards adversely affect firm value.
Undoing the powerful anti-takeover force of staggered boards, Guo, R. J., Kruse, T. A., & Nohel, T. (2008). Journal of Corporate Finance, 14(3), 274-288. This paper scrutinizes instances of de-staggering of boards of directors. It concludes that staggered boards, acting as anti-takeover defense instruments, adversely affect wealth and that de-staggering boards tends to benefit shareholders. Furthermore, analysing investor feedback for the duration predating Sarbanes–Oxley, the study finds that takeover bidders are much more likely to target de-staggered firms.
Board structure and firm performance: Evidence from India’s top companies, Jackling, B., & Johl, S. (2009). Corporate Governance: An International Review, 17(4), 492-509. Jacklin and Johl’s study focuses on Indian firms and, consequently, reveals a correlation between internal governance structures and fiscal performance. The authors employ two discrete corporate governance postulates – agency theory and resource dependency theory to explain the efficacy of a board of directors in the Indian business environment. Efficiency parameters include size and composition of the board, and other facets of board leadership.
The role of boards of directors in corporate governance: A conceptual framework and survey, Adams, R. B., Hermalin, B. E., & Weisbach, M. S. (2010). Journal of economic literature, 48(1), 58-107. This study scrutinizes historical literature on boards of directors, especially research papers published after E. Hermalin and Michael S. Weisbach’s 2003 survey. The study concludes that there is a correlation between board structure and board activity. It also asserts that historical literature jointly interprets both the director-selection process as well as the consequences of board structure on board activity.
An examination of socially responsible firms’ board structure, Webb, E. (2004). Journal of Management and Governance, 8(3), 255-277. This paper analyzes board structures from a sample of 394 socially responsible (SR) firms. Comparison of this sample data with empirical data reveals that SR firms typically contain effective board structures. This efficiency can be attributed to two factors: Presence of women and outsiders in the board of directors. Lesser occurrence of CEO/Chairman duality.
Capital structure, staggered boards, and firm value, Jiraporn, P., & Liu, Y. (2008). Financial Analysts Journal, 64(1), 49-60. Jiraporn and Liu scrutinize the effects of staggered boards on capital structure choices. A firm’s focus on its debt to equity ratio often reduces agency costs. A staggered board ensures that the firm’s leverage is kept at a minimum by persuading managers to adopt lower debt levels. This is true for both industrial as well as regulated firms, especially in the period preceding the Sarbanes–Oxley Act of 2002.
Board structure, antitakeover provisions, and stockholder wealth, Sundaramurthy, C., Mahoney, J. M., & Mahoney, J. T. (1997). Strategic Management Journal, 18(3), 231-245. This paper samples 261 businesses from the period 1984 – 1988 and scrutinizes 486 anti-takeover defense measures that these firms adopted (including staggered boards). It concludes that the presence of outsiders in a business’ board structure greatly influences negative market reactions to anti-takeover provisions. However, this negative outcome can be somewhat contained by separating the positions of CEO and chairperson of the board.