Risk & Compliance

The Staggering of Staggered Boards

The election of board members in differing years may be on the way out. But many companies that agreed to elect their entire boards in a single yea...
Stephen TaubOctober 29, 2004

A growing number of companies is agreeing to eliminate the practice of staggering the years in which individual board members are elected.

Indeed, the percentage of companies in the S&P 500 that have classified, or staggered, boards fell from 63 percent in 2001 to 60 percent in 2003, according to the Investor Responsibility Research Center (IRRC).

The trend seems to suggest that companies might no longer feel the need of board staggering as a defense against hostile takeovers. Many companies staggered their boards in the first place mainly to guard against takeover attempts, since the practice makes it hard for the prospective acquirer to stage a proxy fight if only a minority of directors comes up for re-election in a given year.

In that case, the acquirer couldn’t gain a majority of the board in one year. It would need to do it over two years, which is expensive from a filing standpoint and ties up investment capital for two or more years.

Even though many companies have announced plans to declassify their boards, however, a large percentage aren’t implementing their new policies as quickly as many might have anticipated. More than 80 percent of all companies that have declassified their boards this year as a direct result of a proxy proposal are not planning to implement the change immediately, according to data culled by New York City-based TrueCourse, Inc.

“A common misperception is that once a company implements a change to declassify their board, the change is immediate and absolute,” points out sharkrepellent.net, TrueCourse’s Web site. “This is not always the case.”

The Web site notes that just 17.2 percent of companies have implemented the change immediately and elected their entire boards for a one-year term at their 2004 annual meetings. Among those that immediately declassified their boards include Dynamic Materials Corp., Harken Energy Group, and United Auto Group, Inc., according to the Web site.

However, others plan to implement the change over the next few years. For example, Lucent Technologies Inc., Safeway Inc. and SBC Communications elected directors whose terms were slated to expire at the 2004 annual meeting for one-year terms. At the same time, they asked those directors whose terms are set to expire in the future to resign and stand for re-election at the 2005 annual meeting, thus implementing the new policy at that time, according to sharkrepellent.net.

Merck & Co, Inc., Xcel Energy Inc. and Sapient Corp. are permitting their directors to serve their full terms before making the changeover to one-year terms. That means their boards will still be classified for two more years.

Yet another 15.5 percent of companies, including FirstEnergy Corp., Manor Care, Inc. and The Dow Chemical Co., that voted to declassify in 2004, will allow the directors elected this year to serve a full three-year term. Thus, those companies won’t fully declassify until their 2007 annual meetings, Sharkrepellent.net pointed out.