Staggered Board

A staggered board consists directors grouped into classes serving different terms in length. A staggered board is established mainly to thwart a potential hostile takeover bid. Three to five classes are the norm. During each election term, only one class is open to elections, thereby staggering the board directorship.

A staggered board is also known as a classified board because of the different "classes" involved. For example, a company with nine board members divided into three classes — Class 1, Class 2 and Class 3 — will assign three members per class. Class 1 members serve a one-year term on the board; Class 2 members serve two years; and Class 3 members hold their seats for three years. This means, in the case of this company, only a third of the board composition can turn over in a given year, which presents obstacles for a would-be hostile bidder that wants to gain control of a board. With the staggering arrangement, it would take much more time for an unwelcome party to achieve its goal in taking control of a board than for a non-staggered board that could be potentially dislodged at one time.

Critics of staggered boards believe that a company entrenches the board directors, who therefore may be less likely to work hard in the interests of shareholders if they do not feel external pressure to maintain high levels of corporate performance. If this board system deters potential activist investors or unsolicited bidders who have genuine intentions to boost shareholder value, then shareholders can miss out. However, on the flip side, a staggered board can serve as a protective shield for a company against a large investor looking for a quick score or a hostile bidder who might desire to carve up the company. In addition, more board continuity can be viewed as a positive factor in corporate governance, as longer-term strategic plans of a company could be better executed.