A staggered board, also known as a classified board, is an arrangement in which members of a board of directors serve overlapping terms rather than concurrent terms. This means that not all directors are elected at the same time; instead, they are grouped into classes, with each class standing for election in different years.
Benefits of a Staggered Board:
Stability and Continuity: Since only a fraction of board members are up for election in any given year, this ensures stability and continuity of leadership, as well as policies.
Defense against Takeovers: A staggered board can serve as a defensive measure against hostile takeovers, as a hostile party cannot immediately gain control of the entire board, even if they purchase a significant amount of company stock.
Depth of Experience: With staggered terms, experienced board members always remain, providing historical insights, context, and mentorship to newer board members.
Criticism of Staggered Boards:
Reduced Accountability: Because not all members are up for reelection at the same time, shareholders may find it more difficult to oust underperforming directors.
Potential for Entrenchment: Some critics argue that staggered boards can lead to director entrenchment, where members who might not be acting in the best interest of the shareholders continue to retain their seats.
Impact on Shareholder Value: Studies have suggested that companies with staggered boards might have lower firm valuation compared to those with unitary boards.
Examples of Staggered Boards:
Example A - A Tech Company: Consider a tech company "TechXYZ" with a board of nine members, divided into three classes. Each year, three board members are elected for a three-year term. This model ensures that even if a competitor buys a significant stake in TechXYZ and gets some nominees elected, they still won't have immediate control over the company's strategy or direction. This provides TechXYZ time to react and adjust.
Example B - A Hostile Takeover Scenario: Imagine a pharmaceutical company "PharmaABC" with a staggered board. A rival company wishes to execute a hostile takeover. Even if this rival company can sway shareholder sentiment in one year, they'll only be able to replace a fraction of the board. It would take multiple years of continued influence to gain board control, making the takeover more difficult and time-consuming.
Understanding the Implications: Investors should understand the implications of a staggered board on their investment. While it may offer stability, it could also mean that change is slow, especially if new strategies or shifts in company direction are desired.
Research on Performance and Governance: Before investing, take a look at the performance of companies with staggered boards compared to those without. Also, investigate the company's corporate governance policies to see if other mechanisms ensure director accountability.
Voting Power: Recognize that the power to make significant changes in the board is diluted, as you can only vote on a subset of the board each year.
A staggered board offers a balance between continuity and the potential for change. While it can protect against hostile takeovers and ensure stability, it may also limit shareholders' power to influence the full board. Investors need to weigh these advantages against the potential drawbacks, considering their investment objectives and risk tolerance.