DEFINITION of Stagger System

A stagger system is a method of electing a company's board of directors that puts up only part of the board for re-election in any one year, in contrast to the system in which all board members go up for re-election annually.

BREAKING DOWN Stagger System

Staggers systems are common practice in the United States. Each group of directors falls within a specified "class" — of which three to five classes is the norm — which is why staggered boards are also called classified boards. Class 1 members serve a one-year term on the board, Class 2 members serve two years and Class 3 members hold their seats for three years, and so forth.

Staggered boards make hostile takeovers extremely difficult. Hostile bidders have to win more than one proxy fight at successive shareholder meetings to take control of the target company, which takes years. This is why stagger systems are a particularly effective anti-takeover measure, when combined with poison pills.

Defenders of staggered boards say they promote stability and continuity in management, and foster a long-term strategic vision for corporate initiatives. But by making it more difficult to replace directors, and protecting companies from raiders, they can harm shareholders’ ability to hold the board to account. Consequently, say shareholder advocacy groups, directors may not always act in the interests of shareholders, which damages shareholder value.