A staggered (or classified) board is a board where directors are grouped into different classes, typically three to five. They often serve terms of varying lengths, allowing elections to occur at different intervals. This board structure is a defence against a hostile takeover, as it prevents shareholders from replacing a majority of the board in one election.
How does a staggered board structure work?
Class division: The board is divided into multiple classes. The number of classes usually depends on balance and preferred governance structures. The key is to have roughly the same number of directors in each.
Tenures: Directors within each class serve staggered terms (meaning their tenures expire at different times) despite potentially having the same duration. The term lengths for each class can vary depending on the company’s byelaws. In one scenario of a three-class staggered board, Class A directors may serve for three years, Class B for two, and Class C for one year. Alternatively, they could all serve terms of the same length, but their elections would be staggered to ensure leadership continuity and stability.
Election process: Each class of directors is re-elected at different times. During each election term, only a single class is open to board recruitment. In a three-class structure, it means that only a third of the board composition can turn over in any one year.
Entrenches existing management, preventing stakeholders from introducing new leadership quickly
Potentially delays necessary strategic changes and responses to market dynamics, stifling innovation
Limits board diversity and effective decision-making by limiting the ability to refresh the board with new expertise and perspectives
Complicates the process of reforming corporate governance, hindering efforts to meet shareholder expectations
Comparison with other structures
Unitary board
A unitary or single-tiered board is composed of directors elected at each AGM without staggered terms. It comprises both executive and non-executive directors in a single governing body.
Compared to a staggered board, this structure enables quicker board changes and improves accountability to shareholders. However, it may lead to frequent turnover and instability, with directors more focused on short-term results.
Mixed board
A mixed board comprises elements of unitary and two-tiered boards. This creates a structure with separate supervisory and management functions. It typically has both staggered and non-staggered terms among directors. This structure aims to deliver more effective oversight, transparency and accountability compared to a staggered board.
Best practices
Ensure clear communication between the board, management and shareholders regarding the benefits of a staggered board structure for long-term planning and stability.
Recruit directors from varying backgrounds and industries to enrich decision-making processes and mitigate the risk of groupthink.
Conduct regular board evaluations and individual director assessments to ensure effectiveness.
Maintain open lines of communication with shareholders and seek their input on significant board decisions.
Develop and maintain sound succession planning practices for key leadership roles.
Encourage ongoing education and development opportunities to keep board members informed about the latest industry trends and governance practices.
Maintain transparency in board operations and decision-making processes.
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