Corporate governance issues grow more complex
It's time to take stock of the corporate governance movement. While corporate governance has made great strides in recent years, it is becoming more complex as companies take the corporate governance fight to a new terrain. Here are two examples: Companies are increasingly leveraging the value of incorporating outside of Delaware. Chesapeake Energy recently lobbied the Oklahoma Legislature to adopt a provision requiring all Oklahoma corporations to have a staggered board through Jan. 1, 2015. Iowa and Indiana have also recently adopted provisions requiring their companies to have staggered board provisions. For those who complain about Delaware, it is much worse for corporate governance advocates outside that small state.
Second, corporations have also realized that the process for initial public offerings includes a corporate governance loophole. Institutional Shareholder Services and the other proxy advisory services do not assess companies' corporate governance at the I.P.O. stage. Prospective shareholders also do not seem to care. Most purchasers in an I.P.O. quickly flip their shares.
So we get LinkedIn, which has both a dual-class share structure and a staggered board, among other shareholder unfriendly provisions. LinkedIn also adopted a provision in its charter requiring that its staggered board provision could only be repealed by 80 percent of its votes. This is an almost impossible threshold to meet. And it is not only hot Internet stocks that raise these issues. Bankrate, a recent I.P.O., has a similar locked-in staggered board provision. These changes show how corporate governance is becoming more complex, and with complexity, there are unintended consequences.
Staggered board of directors
A staggered board of directors or classified board is a prominent practice in US corporate law governing the board of directors of a company, corporation, or other organization in which only a fraction (often one third) of the members of the board of directors is elected each time instead of en masse (where all directors have one-year terms). Each group of directors falls within a specified "class"—e.g., Class I, Class II, etc.—hence the use of the term "classified" board.[1]
In publicly held companies, staggered boards have the effect of making hostile takeover attempts more difficult. When a board is staggered, hostile bidders must win more than one proxy fight at successive shareholder meetings in order to exercise control of the target firm. Particularly in combination with a poison pill, a staggered board that cannot be dismantled or evaded is one of the most potent takeover defenses available to U.S. companies.[2]
Institutional shareholders are increasingly calling for an end to staggered boards of directors—also called "declassifying" the boards. The Wall Street Journal reported in January 2007 that 2006 marked a key switch in the trend toward declassification or annual votes on all directors: more than half (55%) of the S&P 500 companies have declassified boards, compared with 47% in 2005.[3]
Similar staggering of terms is used for that reason in the election of U.S. Senators, members of the Securities and Exchange Commission, and other public bodies. By design, it has the effect of limiting control of a representative body (a board of directors, the Senate, the SEC, etc.) by the body being represented (shareholders, voters, the President).
The use of a staggered board can minimize the impact of cumulative voting.[4]
[edit] See also
[edit] Notes
- ^ See Faleye,O., 2007, Classified Boards, Firm value, and Managerial Entrenchment, Journal of Financial Economics83, 501-529.
- ^ See Lucian Bebchuk, John C. Coates IV, and Guhan Subramanian, The Powerful Antitakeover Force of Staggered Boards: Theory, Evidence, and Policy, 54 Stan. L. Rev. 887 (2002).
- ^ Jared A. Favole, "Big Firms Increasingly Declassify Boards", The Wall Street Journal, Jan. 10, 2007.
- ^ http://www.stroock.com/SiteFiles/Pub341.pdf
[edit] References
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