Staggered Board: A Defense Mechanism in Corporate Governance

A staggered board is a corporate governance strategy where board members are elected in increments, complicating quick control takeovers.

A staggered board (also known as a classified board) is a corporate governance strategy where the board of directors is divided into different classes, with each class elected for overlapping terms. This structure ensures that only a portion of the board is up for election at any given time, typically one-third each year. This makes it more challenging for hostile takeovers or rapid changes in control of the board, providing a form of defense against unwanted acquisitions.

Functionality of a Staggered Board

Election Mechanism

In a typical staggered board setup, board members are categorized into different groups. Instead of being elected yearly, every category or class might be elected over a three-year cycle, as shown below:

$$ \text{Year 1: Elect Class I Directors (⅓ of the board)} $$

$$ \text{Year 2: Elect Class II Directors (⅓ of the board)} $$

$$ \text{Year 3: Elect Class III Directors (⅓ of the board)} $$

Defensive Measure

By staggering the terms, the board secures itself from abrupt changes. A hostile entity must win multiple election cycles to gain majority control, providing stability and allowing the existing board to respond more effectively to such threats.

Types of Staggered Boards

• Simple Staggered Board: The board is divided into three classes, elected in continuous cycles.
• Complex Staggered Board: Involves more intricate categorization, potentially combining different lengths of terms, and possibly including special provisions for emergency scenarios.

Special Considerations

Pros

• Stability in Management: Ensures continuity and stability in board decisions.
• Defense Mechanism: Provides a shield against hostile takeovers, encouraging potential acquirers to engage in more negotiated acquisitions.
• Long-term Planning: Board members can plan with a long-term perspective, without fear of immediate replacement.

Cons

• Diminished Accountability: Reduced immediacy in elections may weaken the board’s accountability to shareholders.
• Entrenchment: Can lead to entrenchment of directors who may not act in the best interest of shareholders over time.

Examples

• Berkshire Hathaway: Historically adopted staggered boards for stability.
• Netflix: Implemented staggered boards as part of its anti-takeover strategy.

Historical Context

The concept of staggered boards has been in place for decades, primarily evolving in response to the rise of hostile takeovers in the 1980s. As companies sought ways to protect themselves from corporate raiders, staggered boards became a popular mechanism due to their effectiveness and relative simplicity.

Applicability

Staggered boards are most commonly found in publicly traded companies where the threat of unsolicited takeovers is significant. They are less common in private companies but can still be used for ensuring stability in governance.

Comparisons

• Unitary Board: In contrast to staggered boards, all members of a unitary board are elected annually, making board turnover more rapid.
• Dual Class Structures: Another anti-takeover mechanism where different classes of shares have different voting rights.

Related Terms

• Proxy Fight: An attempt by shareholders to influence the company’s decisions by voting for alternative directors.
• Poison Pill: A defensive tactic used by a company to prevent or discourage a hostile takeover.

FAQs

What are the advantages of a staggered board?

Staggered boards provide stability, encourage long-term strategic planning, and offer a defense mechanism against hostile takeovers.

How does a staggered board differ from a unitary board?

Staggered boards have directors elected in increments over multiple years, while unitary boards have all directors elected annually.

Are staggered boards common?

They are relatively common among large publicly traded companies, though they have seen reduced popularity due to increasing shareholder activism advocating for more direct accountability.

References

1. Bebchuk, L. A., Coates, J. C., & Subramanian, G. (2002). “The Powerful Antitakeover Force of Staggered Boards: Theory, Evidence, and Policy”. Stanford Law Review, 54(5), 887-951.
2. Lipton, M., & Rosenblum, S. A. (1991). “A New System of Corporate Governance: The Quinquennial Election of Directors”. University of Chicago Law Review, 58(1), 187-253.

Summary

A staggered board is a corporate governance approach intended to secure stability and act as a defense mechanism against hostile takeovers by spreading out the election of directors over several years. It offers benefits in terms of stability and long-term planning but can also pose challenges related to accountability and director entrenchment. As part of a company’s anti-takeover strategies, staggered boards play a crucial role in ensuring measured and stable corporate governance.