Staggered Board: What it is, How it Works, Pros and Cons

What Is a Staggered Board?

A staggered board is a board that consists of directors grouped into classes who serve terms of different lengths. A staggered board is typically established to dissuade a potential hostile takeover bid. A typical staggered board has three to five classes of positions on the board, each carrying terms of service that vary in length, allowing for a staggering of elections. 

How a Staggered Board Works

A staggered board is also known as a classified board because of the different classes involved. During each election term, only one class of positions are open to new members, thereby staggering the number of openings available within the board directorship at any one time. For example, a company with nine board members divided into three classes—Class 1, Class 2 and Class 3—will assign three members per class. 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. 

This means that only a third of the board composition can turn over in any given year, thus presenting a formidable obstacle for any would-be hostile bidders that might seek to gain control of the board. Because of the staggered arrangement of open positions, it would take much more time for an unwelcome party to achieve its goal in taking control of a staggered board than for a non-staggered board—one that could potentially be dislodged at one time.

Advantages and Disadvantages of a Staggered Board

Critics of staggered boards believe that such arrangements may run the risk of entrenching individuals within the board of directors—individuals who may be less likely to work hard in the interests of shareholders without the presence of external pressure to maintain high levels of corporate performance. If this board system deters potential activist investors or unsolicited bidders who have genuine intentions to boost shareholder value, then shareholders can miss out. 

However, on the flip side, a staggered board can serve as a protective shield for a company against a large investor looking for a quick score or a hostile bidder who might desire to carve up the company immediately upon taking control. In addition, the board continuity typically associated with a staggered board approach can be viewed as a positive factor in corporate governance, as it lends itself to the execution of a company’s long term strategic plans. 

A 2016 Harvard study has shown that the implementation of staggered boards has been on the decrease in recent years, with 60% of S&P 1500 companies and 80% of S&P 500 companies reporting that they hold annual elections for all directors. One of the contributing factors to this decline is the Shareholder Rights Project, an organization based out of Harvard Law School. Additionally, studies have shown that companies with staggered boards have statistically boasted lower shareholder returns than those without, furthering the argument that staggered boards are typically not in the best interest of shareholders.