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Staggered Board Of Directors

staggered board of directorsWhat are the pros and cons of having a staggered board of directors (aka a classified board)?


(Agent, JKS Solutions, Inc.) |

According to FactSet Research Systems, between 2000 and 2009, the number of S&P companies with classified boards declined from 300 to 164. The primary arguments made by proponents of declassified boards (those boards whose non-management Directors face election annually) are that classified boards could be associated with (1) lower firm value and (2) worse corporate decision making... due to such Directors avoiding accountability to shareholders., i.e., if those Directors' seats were on the line each year, they would be less comfy and perform better.

One study from 2008 (Bates, Becher and Lemmon) indicated mixed results on the argument, citing that while classified boards are associated with higher takeover premiums, they are also linked to lower likelihood of takeover and perhaps lower firm valuation.

Proponents of classified boards argue that longer terms of non-management Directors (e.g. three years, etc.) leads to (1) greater stability and continuity (that such Directors offer more knowledge and deeper counsel about the business based on their longer tenure) and (2) protection against abusive takeover tactics. Those proponents also try to wrestle away the other side's main argument by asserting that classified boards actually have greater independence than declassified boards because their tenure allows them to avoid pressure from short-term shareholders having an agenda contrary to the long-term goals of the organization/shareholders.

In my view, while both arguments have merit, there should not be a one-size-fits-all approach to board structure and each case should be evaluated on its own.


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