A staggered board of directors, which is also referred to as a “classified board,” is a common type of structure that you’ll find in many companies. It is also a declining type of board as more companies are looking at having a declassified board instead. The number of S&P companies with a staggered board of directors declined by 50% between 2000-2009. Despite the decline, there are certain pros and cons of a staggered board of directors which should be considered. Here are some of the key points of the debate.
The Pros of a Staggered Board of Directors
1. Non-management directors receive a longer term.
Instead of being elected to a board of directors on an annual basis, a classified board offers non-management directors a longer overall term of service. This allows people from outside of the business to receive more dividends from their involvement. Instead of facing an annual election, they can focus the issues which a business may face.
2. There is protection from an aggressive or abusive takeover.
Because it may be 3+ years before a non-management director faces another election, a staggered board of directors naturally prevents an aggressive or abusive takeover of company interests. Many issues which cause dissent and disgruntlement tend to be short-term in nature, so instead of making emotional decisions, electors can focus on doing what is right for the business.
3. There is less pressure to bow to short-term needs.
Most businesses must focus on long-term goals in order to survive. When a company is publicly traded, however, there tend to be numerous short-term shareholders that want immediate profits. A staggered board of directors can help create the stability long-term investors need because there isn’t as much pressure to make instant profits that might cost everyone their job in the future.
4. It reduces training needs.
If you have a board of directors which is constantly changing, then you’re investing resources into the new members who need to be trained and brought up to date. This means the board loses a bit of its continuity. With a staggered election cycle, only a certain percentage of the board will be up for election every year, which means continuity can be in place because there will always be veteran board members in place.
The Cons of a Staggered Board of Directors
1. A staggered board typically reduces the value of a company.
The value of a company is affected by a staggered board because the directors are locked into place for an extended period of time. If the decisions made by the board are poor, then shareholders have little in the way of financial protections beyond getting out and cutting their losses. Reduced levels of changeover are directly correlated to lower company values.
2. Sometimes you do need a revolution.
Evolution within a company is always the best way to go… except when it isn’t Sometimes you do need to have a revolution. Changes can help a business to survive even some of the most difficult of times. If only a small fraction of the board is up for an election in any given year, the changes which need to get made can be difficult to make and that may sink the business.
3. There may not be any need to follow the recommendations of a vote.
In 2009, nearly 100 board members in the top US companies failed to receive 50% or more of the votes cast by their shareholders. Not a single one of those board members who lost an election actually stepped down. For Pulte Homes, shareholders voted out 3 directors up for election. The board just reappointed them anyway. Some systems allow a director to stay in place if just 1 vote is received, making the point of having an election a waste of time.
4. It is always difficult to make the correct decisions during an election.
The US is evidence of this. Budget deficits have been run for consecutive years for more than a decade. Programs like Social Security are serially underfunded. Yet the same type of politician tends to be elected by a majority of the people. Change is naturally difficult and staggered boards make it even more difficult to change because there are fewer elections.
The pros and cons of a staggered board of directors show that there is some merit to this format type. It may not be the best option for every company, but structure must be taken on a case by case basis. Because of this, each key point should be carefully weighed when designed the structure of every company’s board of directors.