Staggered Boards and Firm Value, Revisited (Tobin's Q) [STUDY]VW Staff
SSRN analysts Martijn Cremers, Lubomir P. Litov and Simone M. Sepe revisit staggered boards and firm value.
Discussions on the relationship between boards of directors and shareholders have occupied the center stage of the corporate governance debate for years, showing no sign of waning. On the one hand, advocates of shareholder empowerment argue that a shareholder-driven corporate model would produce valueincreasing governance arrangements by reducing the room for managerial opportunism (Bebchuk, 2005, 2007, 2013). On the other, opponents of this model contend that “director primacy” is preferable (Bainbridge, 2006; Blair and Stout, 1999), as shareholder dominance would produce its own, significant set of agency costs (Bratton and Wachter, 2010). In particular, shareholder dominance could lead to managerial “short-termism”: under the pressure of empowered shareholders, managers would have incentives to pursue short-term returns at the expense of long-term firm value (Lipton and Rosenblum, 1991; Strine, 2006).
Staggered (or classified) boards have long played a central role in this debate. In a staggered board, directors are typically grouped into three different classes. Only one class of directors stands for election each year, with each director being elected to a term of typically three years (i.e., a term equal in length to the number of classes). In contrast, in a non-staggered board, all directors stand for election every year, as they serve one-year terms. Hence, a staggered board’s directors are further removed from short-term shareholder pressure, because challengers need to win at least two election cycles to gain board majority when only about a third of directors stands for (re-)election each year. It is thus unsurprising that advocates of shareholder empowerment view staggered boards as a quintessential corporate governance failure. In this view, insulating directors from market discipline diminishes director accountability and encourages self-serving behaviors by incumbents such as shirking, empire building, and private benefits extraction (Bebchuk and Cohen, 2005; Bebchuk, Cohen, and Ferrell, 2009). On the contrary, defendants of staggered boards view staggered boards as an instrument to preserve board stability and strengthen long-term commitments to value creation (Koppes, Ganske, and Haag, 1999; Lipton, Mirvis, Neff, and Katz, 2012).
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