A staggered board can support continuity, strategic stability and help to defend against takeovers. Dan Byrne outlines the pros and cons of this distinctive governance structure
A staggered board is a type of board structure designed to provide stability and continuity at corporate governance level. It divides its directors into “classes” – each serving a different time length across staggered terms. Usually, more senior directors will serve longer terms.
In modern governance, the structure of a company’s board of directors can help to steer an organisation’s strategic direction.
Different companies will structure their boards differently to achieve the results they want. Adopting a staggered board structure is one option.
Staggered boards are designed to ensure that only some directors are up for re-election at any given time. This has the advantage of ensuring there is always continuity across different election cycles as only some faces will be new.
It also reduces the likelihood of hostile takeovers, which usually need a rapid and large-scale leadership change to succeed.
The processes of a staggered board
The operation of a staggered board involves dividing directors into classes; it could be as low as two or as much as five. Each class will be up for election/re-election at different times.
Take the example of a board with three classes: each class serves a three-year term, but only one class is up for election each year. In other words, at least two-thirds of the board will stay the same after any election.
In cases where the more senior directors serve longer terms, class one may be up for election every year, class two every three years, and class three (the most senior) every five years.
These rules will depend on the company.
The advantages of a staggered board
A staggered board can help to ensure continuity after each election and delay or outright eliminate the risk of hostile takeovers.
It can also reduces the logistics challenge of training and onboarding several new directors simultaneously. There will always be a healthy cohort of veterans to oversee any work needed in this area, feeding a culture of long-term planning.
Disadvantages
Much of the criticism directed at the staggered board approach comes from shareholders who effectively only have a say on the future of a third (or less) of directors at any given time.
This means shareholder criticism is less likely to be listened to and the board may be more concerned with itself or its relationship with management.
Creating a staggered board
If an organisation is thinking about instituting a staggered board, it must analyse the company’s governance thoroughly before doing so.
How much does your board depend on fresh, new experience? If it’s a lot, a staggered board might not be for you.
How concerned are you about a hostile takeover or activism? If the answer is ‘a lot,’ then a staggered board may be for you.
You should also consider how much your company spends on onboarding: how easy it is to find relevant talent at the board level, and how confident you are in your current board?
By asking the right questions, you may find that introducing a staggered board structure is beneficial for your organisation.
Dan Byrne is a writer with the Corporate Governance Institute
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