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:
- Providing strategic oversight to guide the company’s long-term goals and aligning decisions with shareholder value.
- Creating plans for succession to maintain balanced skills and experience.
- Upholding high standards of governance to ensure transparency, compliance, and shareholder rights.
- Focusing on risk management and focusing on long-term threats like hostile takeovers.
- Supporting a measured approach to mergers and acquisitions, slowing changes in composition to resist hostile takeovers.
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.
- Staggered board: Only a portion of directors are up for election year. Terms are typically set for multiple years, such as three-year terms, with elections for a subset of the board each year.
- Non-staggered board: All directors are elected annually, wherein shareholders can vote on the entire board composition each year. This makes it easier for shareholders or acquiring entities to replace the board quickly, if needed.
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:
- Preventing hostile takeovers or unwanted acquisitions
- Managing large-scale transitions
- Ensuring experienced directors with regulatory knowledge stay in place
- Supporting founder-led or mission-centric companies
- Prevent frequent leadership changes that could disrupt the progress of long-term strategic projects
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
- Protection against hostile takeovers: Staggered boards make it more challenging for hostile entities to gain board control quickly, potentially deterring buyouts.
- Enhances board cohesion: Directors who serve longer together can develop stronger working relationships and a cohesive board culture.
- Supports institutional knowledge: Directors serving staggered terms help preserve institutional knowledge, which is critical for companies with complex histories and markets.
- 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
- Reduced shareholder influence: Staggered terms can restrict shareholders’ ability to overhaul the board quickly, which may frustrate activist shareholders pushing for immediate changes.
- Lack of accountability: Directors with longer terms may feel less pressure to perform as they are not subject to annual re-elections.
- Longer timeframes for correcting ineffectiveness: Staggered terms make it more challenging to quickly replace ineffective members. Hence, allowing underperforming directors to stay on longer.
- 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.