What is a Staggered Board?


A staggered board, also referred to as a classified board, is a structure in which board members are divided into different classes with staggered terms. Instead of electing directors annually, a staggered board only replaces a portion of directors each year—typically one-third is divided into three classes.

This setup creates continuity within the board, as only some directors are up for re-election each cycle, rather than all at once. In a staggered board, hostile takeovers may be prevented, as potential acquirers cannot quickly replace the entire board.

What are the responsibilities of a staggered board?

The responsibilities of a staggered board are largely the same as those on corporate boards. These include:

What is the difference between staggered and non-staggered boards?

The primary difference between staggered and non-staggered (or annually elected) boards lies in the election and turnover of directors.

Non-staggered boards provide greater flexibility for shareholders but lack the stability benefits seen in staggered structures.

When should you adopt a staggered board structure?

Adopting a staggered board structure may be suitable under certain conditions where stability is valued. It can be beneficial for situations such as:

This structure, however, may be viewed unfavorably by activist shareholders who seek more influence in company decision-making and prefer the flexibility of annual elections.

The Pros and Cons of Board Staggering

A staggered board structure has distinct advantages and disadvantages that companies must weigh before implementing.

Pros of Staggered Boards

  1. Protection against hostile takeovers: Staggered boards make it more challenging for hostile entities to gain board control quickly, potentially deterring buyouts.
  2. Enhances board cohesion: Directors who serve longer together can develop stronger working relationships and a cohesive board culture.
  3. Supports institutional knowledge: Directors serving staggered terms help preserve institutional knowledge, which is critical for companies with complex histories and markets.
  4. Enhanced succession planning: Staggered terms allow for staggered retirements, enabling gradual onboarding of new directors and efficient knowledge transfer to new members.

Cons of Staggered Boards

  1. Reduced shareholder influence: Staggered terms can restrict shareholders’ ability to overhaul the board quickly, which may frustrate activist shareholders pushing for immediate changes.
  2. Lack of accountability: Directors with longer terms may feel less pressure to perform as they are not subject to annual re-elections.
  3. Longer timeframes for correcting ineffectiveness: Staggered terms make it more challenging to quickly replace ineffective members. Hence, allowing underperforming directors to stay on longer.
  4. Increased criticism from governance advocates: Some organizations advocate for annual board elections to improve accountability. A staggered board may face criticism for being less transparent and responsive.

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