Do staggered (or classified) boards harm shareholder value through entrenchment or help through stability? In a forthcoming RCFS paper, “Staggered Boards and the Value of Voting Rights,” Oğuzhan Karakaş and Mahdi Mohseni revisit this question by using a novel methodology and provide causal evidence on the entrenchment view of staggered boards. Existence of staggered boards, where only a fraction of board members is up for election in a year, has been argued to be an effective and prevalent antitakeover measure for public corporations. Analyzing the impact of staggered boards on the value of shareholder voting rights (i.e., the voting premium), this paper shows that firms with staggered boards have higher voting premiums. Authors estimate the voting premium as the price difference between the stock (i.e., voting share) and the nonvoting share that is synthesized using options, normalized by the stock price. The study reports, for example, firms destaggering their boards have a 65% decrease in their voting premium, while firms staggering their boards experience a 169% increase in their voting premium. Moreover, exploiting plausibly exogenous court rulings, the paper finds that weakening of the staggered firms leads to lower voting premiums, providing strong corroborating evidence on a causal effect. Authors argue that these findings are consistent with the entrenchment view of staggered boards, as the voting premium reflects private benefits of control and inefficiencies in managing firms. It is interesting and important to note, however, that the documented entrenchment effect varies across firms, more pronounced on mature firms and those in noncompetitive industries. Hence, one should be cautious about “one-size-fits-all” approach toward staggered boards.
Spotlight by Isil Erel
Photos courtesy of Oğuzhan Karakaş and Mahdi Mohseni
First published April 30, 2021