A staggered board of directors (also known as a classified board) is a board that is made up of different classes of directors with different service terms. Staggered board terms are structured by the company, commonly including three classes. The staggering of classes can be done simply to assign staggering service terms or it may involve more detailed provisions and responsibilities for each class.
Elections for the directors of staggered boards occur as terms expire with a one-year classification requiring voting each year. At each election, shareholders are asked to vote to fill whatever positions of the board that are vacant or up for re-election. Terms of service for elected directors vary, but one-, three-, and five-year terms are common.
Some companies may use the staggered board structure to meet special needs. For example, they may designate certain committee members to longer terms of service or they may place more experienced directors in longer service terms to solidify their commitment for a longer amount of time.
Information on corporate governance policies and board composition can be found in a public company's prospectus and proxy statement. A company’s board policies are typically created at the time of incorporation and included in their bylaws. Usually, company board policies will require a shareholder vote to change.
Generally, proponents of staggered boards cite two main advantages that staggered boards have over traditionally elected boards: 1) board continuity and 2) anti-takeover provisions—hostile acquirers have a difficult time gaining control of companies with staggered boards.
When a hostile bidder tries to acquire a company with a staggered board, it is forced to take additional steps for negotiation and to wait at least one year for the next annual meeting of shareholders before it can gain control of a board seat. Furthermore, because of the structuring of classes, hostile bidders can become less of a fit for certain positions on the board which can also be a detraction for interventions. Overall, the staggered board structure can be somewhat of a poison pill tactic since it can effectively deter a takeover and guarantee continuity of management.
Opponents of staggered boards argue that they are less accountable to shareholders than annually elected boards. These opponents believe that staggering board terms tend 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?)
The use of staggered boards has been decreasing in the 21st century. A Harvard study showed that in 2015, over 60% of S&P 1500 companies and over 80% of S&P 500 companies held annual elections for all directors.
A campaign organized by the Shareholder Rights Project at Harvard Law School has been a catalyst for the decreasing trend. The downtrend has been particularly significant since 2009.
Through the years, research studies have continuously reported the common expectations of staggered versus annual election board structures. Staggered boards have been shown to cause a reduction in shareholder returns. Staggered boards have also reportedly been successful in mitigating activist interventions and hostile bidding takeovers. In many cases, this has been considered a disadvantage for shareholders as hostile bidders have had the ability to offer shareholders a premium for their shares.
The Bottom Line
Activist interventions and hostile takeovers are a fairly rare occurrence, but the fact remains that boards are elected to represent shareholder interests. Staggered boards may deter interventions or takeovers, potentially withholding premiums paid for shares as a result. Even so, a staggered board does offer some protections including the continuity of leadership, which surely has some value provided that the company is being led in the right direction in the first place.