Staggered Board of Directors: Definition & Examples

Instructor: Lori Forrest

Lori has taught college Finance, Operations and Business courses for over five years. She has a master's degree in both Accounting and Project Management.

How does the board of directors structure help protect shareholders? This lesson will provide definitions and examples of how a staggered board of directors is structured.

Staggered Board of Directors

Have you ever needed to make an important decision for your family? How are these decisions made? Do mom and dad sit down and talk through all decisions? Does one person have authority to make family decisions without consulting the other one?

For companies there are many different individuals involved in decision making. At the highest level you will find the board of directors who represent the shareholders and investors best interest. The structure of the board, however, varies based on the company set-up.

A staggered board of directors is one in which board members serve different terms that intentionally overlap so that not all terms expire in the same year. It's often referred to as a 'classified board of directors' and is a common practice within US corporations.

Under a staggered board, members are elected to one, three, or five-year terms. Board member positions are elected in part based on their classification or as a percentage, typically one-third, as opposed to all board members at one time.

A staggered board of directors has differing member terms so that not all terms expire at the same time.
Empty Boardroom Chairs

Advantages of Staggered Boards

The structure of a company's board of directors protects the organization in several important ways.

Hostile Takeover Protection

First, it makes a hostile takeover much more difficult by limiting majority control. While most mergers and acquisitions occur as a result of a mutual agreement and evaluation of the full impacts to the company and their shareholders, some come about as the result of a hostile takeover bid.

A hostile takeover occurs when one company seeks to acquire another company without board or management approval. This makes the acquisition riskier and could cause major a disruption to the operations of the firm.

Even if a hostile bidder was able to win one seat on the board, they would have to wait at minimum another year to try and win out another seat. However, even two board member votes may not guarantee the necessary approval for the acquisition.

For our decision-making family, mom or dad could make a decision without full agreement or knowledge of the other, causing a potential impact on the day-to-day family plans and activities. The board of directors provides a good balance when making company decisions, as opposed to just one individual having full decision-making authority.

A staggered board is combined with what is known as a poison pill, a corporate tactic used to protect a target company from a hostile takeover. There are two types of poison pills that can be utilized.

  1. A flip-in allows all shareholders, except the acquirer, to buy shares at a discounted rate. This will dilute the acquiring company's shares and make the takeover more expensive.
  2. A flip-over allows stockholders to buy the acquiring company's shares at a discounted rate, like two-for-one.

Poison pills can be installed and removed by board authority, however, this again would be difficult and time consuming with a staggered board structure. Staggered boards grew in popularity in the 1980's as a response to a wave of hostile takeovers.

Poison pills when combined with a staggered board are very effective in reducing the risk of a hostile takeover.
Poison Pill image

Minimize Cumulative Voting

Staggered boards are also believed to minimize the impact of cumulative voting. The U.S. Securities and Exchange Commission reports that cumulative voting is intended to help strengthen minority shareholders interest when voting to elect a director. Shareholders can cast all their votes for a single nominee if there are multiple openings on the board. With only one-half, one-third or even one-fourth of the board being up for election at any given time the likelihood that minority shareholders can use the power of cumulative voting is greatly reduced. In addition, it is reported that long-term business commitments are protected by staggered boards. Furthermore, there is little opportunity for short-term pressure to take control over management.

Current State of the Economy and Staggered Boards

Despite the benefits of protecting the long-term interest in the company with a staggered board, an unstaggered board drives accountability. Some investors are concerned that a staggered board allows members to avoid accountability when not elected annually with performance expectations.

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