Do Staggered Boards Matter for Firm Value?
In the fifth article of our Fall issue, the authors address, and attempt to settle, the heated debate over the effect of staggered boards on corporate performance. Critics of staggered boards claim they enable the entrenchment of inefficient managements and boards; and by working in tandem with poison pills to discourage hostile takeovers of underperforming companies, such boards end up generally reducing corporate values.
Consistent with this theory, some institutional investors and shareholder rights advocates have urged companies to eliminate their staggered boards, while the most extreme critics have gone so far as to call for a regulatory ban. By contrast, supporters of staggered boards argue that they help increase corporate values by allowing managements and boards to focus on long-term goals, and by providing board members a degree of independence from corporate executives who might want them replaced. The most extreme proponents of staggered boards have proposed that such boards be not only permitted, but indeed mandated.
Both sides of the debate claim to be backed by empirical studies whose findings provide sharply conflicting pictures of the consequences of staggered boards. Whereas the earlier studies found that companies with staggered boards have significantly lower values, more recent studies have concluded that staggered boards lead to higher corporate values.
The authors show that neither side of the debate has convincing empirical support. The earlier studies failed to account or control for important variables and corporate characteristics that explain corporate decisions to stagger their boards, or for changes in the companies’ characteristics over time. For example, to the extent that a company’s poor performance drives its decision to adopt or retain a staggered board provision—presumably to give it more freedom to restructure and improve its operations—the association of staggered boards with poor performance ends up confusing cause and effect.
When the authors control for variables that affect both corporate values and the choice of staggered boards in a sample of close to 3,000 U.S. companies from 1990 to 2013, they find that the effect of a staggered board on firm value becomes generally insignificant. As the authors put it, “The effect of a staggered board is idiosyncratic; for some firms it increases value, while for other firms it is value destroying.” On the basis of such findings, the authors caution against legal solutions advocating either wholesale adoption or repeal of staggered boards, urging managements and boards to determine the value-maximizing approach that reflects their own companies’ opportunities and circumstances.
Authored by Yakov Amihud, Markus Schmid, and Steven Davidoff Solomon