What is a Classified Board
A classified board is a structure for a board of directors in which some directors serve for different term lengths, depending on their particular classification. Under a classified system, directors serve terms usually lasting between one and eight years, with longer terms often awarded to more senior board positions (i.e., the chairman of the corporate governance committee).
Classified boards are often referred to as "staggered boards," although staggered boards and classified boards have somewhat different structures. Staggered boards need not be classified, but classified boards are inherently staggered.
BREAKING DOWN Classified Board
The classified board structure features continuity of direction and preservation of skill but has come under harsh criticism from shareholder advocacy groups for a number of reasons. Opponents to the classified structure argue that the system breeds board member complacency and forces directors to develop close relations with management.
Classified Boards as an Anti-Takeover Measure
When an outside group gains control or takes over a company, they may have to wait a number of years before being in a position to take over control of the board of directors when a classified board structure is in place. With only part of the board up for election each year, it helps to insulate a company from a hostile takeover by delaying the amount of time before members of the board can be replaced, and a majority achieved for the acquiring company.
Pros and Cons of Classified Boards
A classified board may be in a better position to successfully prevent proxy contests from a group of stockholders or activist investors who could be pressuring the board on a set of actions. Another possible benefit of having a classified board structure is that the staggered approach promotes stability of the board and fosters a long-term strategic vision for corporate initiatives. With a number of board members being assured of returning on a given year – since only part of the board is up for election – this structure also establishes a level of continuity in management.
On the flip side, having a set of directors locked in for a period of time can be a negative for shareholders and employees if the board makes poor decisions or is slow to react to a change in the business landscape. Failure to make good decisions or pivot strategies in enough time can sometimes lead to a significant drop in operating results, or in a worst case scenario, bankrupt the business. There is also the moral hazard of a board of directors being less accountable to the company's shareholders in a structure where their control is more protected.