What is a staggered board?

A staggered board of directors (also known as a classified board) is a board that is made up of different classes of directors. Usually, there are three classes, with each class serving for a different term length than the other. Elections for the directors of staggered boards usually happen on an annual basis. At each election, shareholders are asked to vote to fill whatever positions of the board are vacant, or up for re-election. Terms of service for elected directors vary, but one-, three- and five-year terms are common.

Information on corporate governance policies and board composition can be found in a public company's proxy statement. Generally, proponents of staggered boards sight two main advantages that staggered boards have over traditionally elected boards: board continuity and anti-takeover provisions - hostile acquirers have a difficult time gaining control of companies with staggered boards. Opponents of staggered boards, however, argue that they are less accountable to shareholders than annually elected boards and that staggering board terms tends to breed a fraternal atmosphere inside the boardroom that serves to protect the interests of management above those of shareholders. (To learn more, read Governance Pays, The Basics Of Corporate Structure and What Are Corporate Actions?)

According to a study conducted by three Harvard University professors and published in the Stanford Law Review, more than 70% of all companies that went public in 2001 had staggered boards. Despite their popularity, however, the study suggests that staggered boards tend to reduce shareholder returns more significantly than non-staggered boards in the event of a hostile takeover. When a hostile bidder tries to acquire a company with a staggered board, it is forced to wait at least one year for the next annual meeting of shareholders before it can gain control. Furthermore, hostile bidders are forced to win two seats on the board; the elections for these seats occur at different points in time (at least one year apart), creating yet another obstacle for the hostile bidder. Hostile bidders that manage to win one seat allow staggered boards the opportunity to defend the company they represent against the takeover by implementing a poison pill tactic to further deter the takeover, effectively guaranteeing continuity of management. Furthermore, in a hostile takeover, hostile bidders tend to offer shareholders a premium for their shares, so in many cases, hostile takeovers are good for shareholders. They get to sell their shares for more money after a hostile bid than they would have before it occurred. According to the Harvard study, in the nine months after a hostile takeover bid was announced, shares in companies with staggered boards increased only 31.8%, compared to the average of 43.4% returned to stockholders of companies with non-staggered boards (Bebchuk, Coates and Subramanian; 2002). Although hostile takeovers are a fairly rare occurrence, the fact remains that boards are elected to represent shareholder interests; because staggered boards may deter takeovers (and the premiums paid for shares as a result of takeovers), this puts the two at odds. Even so, a staggered board does offer continuity of leadership, which surely has some value provided that the company is being led in the right direction in the first place.

For more information on mergers, acquisitions and takeovers, read The Wacky World Of M&As and War's Influence On Wall Street.

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