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Fewer Classified Boards Could Mean Higher Director Turnover

March 7, 2016

Directors are increasingly on the hot seat as board refreshment becomes a focus of shareholders and proxy access continues to gain traction. Indeed, 2,729 new directors joined Russell 3000 boards in 2014, according to a recent Equilar study, an average of nearly one per company and occurring every 3.2 hours.

Because board performance has become a more focused concern for shareholders, the transition from classified to declassified boards has been a popular way to prevent director entrenchment and keep boards from becoming stagnant. A classified, or staggered, board means that only a fraction of total directors are elected at one time, whereas in a declassified board all directors are elected annually. Typically, a company with a classified board has three classes, in which each class is elected every three years.

Between 2011 and 2015, an increasing number of companies in the S&P 500 and Russell 3000 moved towards a declassified board structure. About 58.5% of Russell 3000 companies had a declassified board in 2015, up from 52.5% in 2011. The S&P 500 experienced a much larger increase in declassification—67.9% of the index’s boards were declassified in 2011 vs. 89.1% four years later.

Despite the case for a declassified structure, some argue that a classified board offers continuity of leadership, increased board stability, improved long-term planning, and an enhanced ability to protect stockholder value and resist abusive tactics in a potential hostile takeover. Allergan’s former General Counsel, Arnold Pinkston, states that shareholders may threaten all of the directors with removal at annual meetings, which “forces directors to respond to shareholders’ demands and deliver more of the company’s value to shareholders in the short term and away from the company’s long term opportunities.” Putting directors up for annual elections may therefore impair decision-making in the long run. Yet some studies found that companies with staggered boards have “lower value, a greater likelihood of making acquisitions that are value-destroying, and a greater propensity to compensate executives without regards to whether they actually do a good job,” according to the New York Times.

The transition from classified to declassified boards was fundamentally about assuaging shareholder and proxy advisors concerns over board entrenchment, and indeed became a trend–almost 90% of S&P 500 companies now have a declassified board. The trend towards declassified boards may lend shareholders a leg up in corporate governance and strategic decision-making, and ultimately open the door for greater diversity.

The data in this report is powered by Equilar BoardEdge, which not only includes information on 140,000 directors and executives qualified for board service, but also more than a dozen categories about each board member’s background and leadership experience. The platform’s defining feature is a networking tool that clearly displays how board members are connected to each other.

For more information on BoardEdge, or to request a demo, click here.

For more information on Equilar’s research and data analysis, please contact Dan Marcec, Director of Content & Marketing Communications at Jasmin Tran, research analyst, contributed to this post.

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