Staggered Board

What is Staggered Board?

The term “staggered board” refers to the arrangement of the board members in such a way that it has members stratified into different classes. In other words, there are multiple classes of directors on the board, and only one has to go through the member election process at any given time. This is where a staggered board differs from a regular board, where all the board members are elected simultaneously. Given its structure, a staggered board is also known as a classified board.

Key Takeaways

Some of the key takeaways of the article are:

• A staggered board is a system that stratifies the board members into multiple classes, mainly to prevent hostile takeovers.
• In this, only a particular class of members opens up for the election process at any time.
• It usually consists of classes of members, wherein election for each class takes place in different years.
• Although it is considered helpful against hostile takeovers, the members don’t always act in the best interest of the shareholders.

How does Staggered Board work?

Many corporates in the US use the staggered board arrangement for their board of directors. In this arrangement, only a particular group or class of members, instead of the entire board of directors, has to be elected at any given time. Each category of members is assigned a particular “class,” such as Class I, Class II, Class III, etc. The underlying principle is that only one class of members will be up for election at any time, which is why the name – “staggered.” It is beneficial for companies that are otherwise vulnerable to hostile takeovers.

Examples of Staggered Board

Let us take the example of two companies (SDF Inc. and BNM Inc.) to illustrate the significance of a staggered board in the corporate setup. Both companies have 12 members on their boards of directors, each serving for three years. The only difference is that SDF Inc. has a staggered board, while BNM Inc. follows the traditional standard setup for the board of directors.

In SDF Inc., the directors are grouped into three classes (Class I, Class II, and Class III) of 4 members each. The terms are expected to expire by May 2022, May 2023, and May 2023 for Class I, Class II, and Class III members, respectively. On the other hand, the terms for all the 12 directors in BNM Inc. are scheduled to expire by May 2022.

Now, let us imagine an adverse situation wherein both SDF Inc. and BNM Inc. are exposed to hostile takeover attempts by their competitors to kill competition and strengthen their market domination. Both companies are trying their level best to overcome the takeover attempts.

The hostile takeover of SDF Inc.

To gain control of SDF Inc., the competitor has to garner a majority on the board. However, given that SDF Inc. has a staggered board, the acquirer can only pocket a maximum of 4 members in the election scheduled for May 2022, which is inadequate to achieve a board majority (4 out of 12). So, the acquirer has to wait for the next round of the election to get more board members and achieve a board majority. However, SDF Inc. may devise a plan during this time to somehow overcome the takeover attempt.

The hostile takeover of BNM Inc.

To gain control of BNM Inc., the acquirer has to garner a majority on the board, which is a relatively more straightforward task in this case, given that BNM Inc. has a typical board setup. So, the acquirer can pocket all the 12 members of the board during the election scheduled for May 2022 and quickly complete the takeover.

The above example demonstrates why a staggered board can be a valuable corporate tool to evade such hostile takeover attempts.

Criticisms

There are many critics of the staggered board who believe that this type of arrangement may run the risk of breeding individuals within the board of directors who may not be willing to work in the best interest of the shareholders in the absence of any adequate external pressure for upholding highest levels of corporate performance.

Advantages

Some of the significant advantages are as follows:

• The members of a staggered board usually enjoy longer tenure, enabling them to focus more on critical business issues.
• The staggered structure of the board provides enough time to devise a strategy to evade abusive or hostile takeover attempts.
• Long-term investors seek steadiness, and a staggered board provides that as the board members are not under much pressure to make any decisions to make dodgy profits.

Disadvantages

Some of the major disadvantages are as follows:

• It may impact a company’s core values as the board members are offered extended terms irrespective of their corporate performance.
• In some cases, the staggering change in board members can make it difficult for the board to achieve a majority for a decision.

Conclusion

So, staggering board arrangement is a handy corporate tool that helps prevent hostile takeovers, besides facilitating continuity of leadership. Moreover, if the board members decide to act in the best interest of the shareholders, then a staggered board can be a great value addition to a company.

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