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Staggered Elections: Definition & Examples

Instructor: Mark Koscinski

Mark has a doctorate from Drew University and teaches accounting classes. He is a writer, editor and has experience in public and private accounting.

In this lesson you will learn about the advantages and disadvantages of staggered elections. You will also learn about the shift towards declassified elections and current trends among company boards of directors.

Staggered Elections

You recently became the chairman of the board of directors for a small company. The organization's current state of affairs is tenuous at best. Your predecessor was a figurehead and some board members have not been seen in years. As an experienced professional you quickly assess the situation and find the board has staggered elections. It may take longer than expected to elect qualified and engaged board members, but you signed on for the long haul. Change can take time and it will take two years to replace a majority of the board in this scenario.

Classified Versus Declassified

Staggered elections occur when approximately one-third of the board of directors are up for election each year. Board members are elected and serve for either one-, two-, or three-year terms. Boards of directors with staggered elections are also referred to as classified boards because the board members are grouped or classified depending on their term length. On declassified boards, the entire board is up for election at one time. Let's take a look at the positives and negatives of having staggered elections. As the new chairman of the board, you are wondering if this is the best scenario for the business.

Advantages

Preserving Stability

One big advantage of staggered elections is that they lend continuity to the organization and preserve stability. Replacing an entire board at one time can be disruptive to the organization and its operations. Additionally, institutional memory may be lost when an entire board is replaced at one time.

Hostile Takeover

Another advantage of staggered elections is that they prevent a hostile takeover. On a board with staggered elections it would take an interested aggressor two years to gain board control with a majority and to eventually take control of the business. This is a slow process in which an aggressor would need to win numerous board seats and potential proxy fights. Only when enough votes are secured to approve a takeover can the company be sold.

Investor Protection

Staggered board elections also protect the interests of long-term investors, making it more difficult for short-term interests to drive the company's agenda. Staggered elections protect board members from shareholder pressure, allowing them to focus on long-term growth instead of immediate profits.

Long Term Growth

Let's say you own stock in a company. As a shareholder you are not really interested in the long term health of the company. You want a quick return on your investment. This mindset can be destructive to the business, sacrificing later growth for immediate profits. Staggered elections may help a board stave off pressures from the shareholders who wish the company to maximize short term returns.

Mentorship

With staggered elections, veteran board members help with the onboarding process by acting as mentors to newer board members. Considering your options as the new chairman of the board, you breathe a sigh of relief knowing you have time to make well-informed decisions regarding board composition.

Disadvantages

The biggest advantage can also be a disadvantage, as the whole board does not turn over in one election. Quickly changing corporate leadership may not be possible if the board becomes entrenched. An entrenched board is one whose members have long tenures and are often aged. A weak or misguided board may leave shareholders with no other option but to sell their shares and cut their losses.

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