Staggered boards have long played a central role in the debate on the proper relationship between boards of directors and shareholders. Advocates of shareholder empowerment view staggered boards as a quintessential corporate governance failure. Under this view, insulating directors from market discipline diminishes director accountability and encourages self-serving behaviors by incumbents such as shirking, empire building, and private benefits extraction. On the contrary, defendants of staggered boards view staggered boards as an instrument to preserve board stability and strengthen long-term commitments to value creation. This debate notwithstanding, the existing empirical literature to date has strongly supported the claim that board classification seems undesirable, finding that, in the cross-section, staggered boards are associated with lower firm value and negative abnormal returns at economically and statistically significant levels.
Posts Tagged ‘Staggered boards’
Toward Board Declassification in 100 S&P 500 and Fortune 500 Companies: The SRP’s Report for the 2012 and 2013 Proxy Seasons
The Shareholder Rights Project (SRP) just released its final report for the 2012 and 2013 proxy seasons, the SRP’s first two years year of operations. As the report details, major results obtained include the following:
- 100 S&P 500 and Fortune 500 companies (listed here) entered into agreements to move toward declassification;
- 81 S&P 500 and Fortune 500 companies (listed here) declassified their boards; these companies have aggregate market capitalization exceeding one trillion dollars, and represent about two-thirds of the companies with which engagement took place;
- 58 successful declassification proposals (listed here), with average support of 81% of votes cast; and
- Proposals by SRP-represented investors represented over 50% of all successful precatory proposals by public pension funds and over 20% of all successful precatory proposals by all proponents.
Towards Board Declassification at 100 S&P 500 and Fortune 500 Companies: Advancing Annual Elections in the 2014 Proxy Season
In a news alert released last week, the Shareholder Rights Project (SRP) announced the work that SRP-represented investors and the SRP are undertaking for the 2014 proxy season, and the significant contribution that this work is expected to make in moving 100 S&P 500 and Fortune 500 companies towards annual elections.
- 31 shareholder proposals for board declassification have been submitted to S&P 500 and Fortune 500 companies for a vote at their 2014 annual meetings (listed here);
- 7 companies—about one quarter of the 31 companies receiving proposals—have already entered into agreements to bring management declassification proposals to a shareholder vote;
- These 7 companies are in addition to 8 other S&P 500 and Fortune 500 companies that have committed to bring agreed-upon management proposals to a vote in future annual meetings following 2012 and 2013 precatory proposals by SRP-represented investors;
- The 15 agreed-upon management proposals to declassify, coupled with board declassifications that have already taken place at 80 S&P 500 and Fortune 500 companies as a result of the work by the SRP and SRP-represented investors (listed here), can be expected to contribute to the wide-scale move toward annual elections; and
- The agreements already obtained following the submission of 2014 proposals, and the ongoing engagements by the SRP and SRP-represented investors with companies receiving 2014 proposals that have not yet entered into such agreements, reinforce the SRP’s expectation that, as a result of the work by the SRP and SRP-represented investors, close to 100 S&P 500 and Fortune 500 companies will have moved toward board declassification by the end of 2014.
ISS Proxy Advisory Services recently recommended that shareholders of a small cap bank holding company, Provident Financial Holdings, Inc., withhold their votes from the three director candidates standing for reelection to the company’s staggered board (all of whom serve on its nominating and governance committee) because the board adopted a bylaw designed to discourage special dissident compensation schemes. These special compensation arrangements featured prominently in a number of recent high profile proxy contests and have been roundly criticized by leading commentators. Columbia Law Professor John C. Coffee, Jr. succinctly noted “third-party bonuses create the wrong incentives, fragment the board and imply a shift toward both the short-term and higher risk.” In our memorandum on the topic, we catalogued the dangers posed by such schemes to the integrity of the boardroom and board decision-making processes. We also noted that companies could proactively address these risks by adopting a bylaw that would disqualify director candidates who are party to any such extraordinary arrangements.
In my paper, Zombie Boards: Board Tenure and Firm Performance, which was recently made publicly available on SSRN, I empirically investigate how board tenure is related to firm performance and corporate decisions, holding other firm, CEO, and board characteristics constant. I find that board tenure has an inverted U-shaped relation with firm value, and that this curvilinear relation is reflected in M&A performance, financial reporting quality, corporate strategies and innovation, executive compensation, and CEO replacement. The results indicate that, for firms with short-tenured boards, the marginal effect of board learning dominates entrenchment effects, whereas for firms that have long-tenured boards, the opposite is true.
The analysis relies on the assumption that some transaction costs prevent boards from fully adjusting to their optimal tenure level. But what are those transaction costs? For long-tenured boards, transaction costs could take the form of agency costs. For instance, board tenure choice may reflect the extent to which CEOs have influence over the board selection process (Hermalin and Weisbach, 1998). Further, firms with staggered boards can only replace a portion of board member each year, in which case the use of a staggered board itself introduces agency problems (Bebchuk and Cohen, 2005). For short-tenured boards, transaction costs could take the form of frictions in the labor market for directors.
In a news alert released yesterday, the Shareholder Rights Project (SRP), working on behalf of SRP-represented investors, announced the substantial results of the work by the SRP and SRP-represented investors during 2012 and in 2013, the SRP’s first two years year of operations. (The results reported below reflect 2013 outcomes through the end of October 2013.)
As discussed in more detail below, major results obtained include the following (for full details on all outcomes see the SRP’s preliminary 2012-2013 Report released yesterday):
- 99 S&P 500 and Fortune 500 companies (see more details here) have entered into agreements to move toward declassification;
- 79 S&P 500 and Fortune 500 companies (listed here) have declassified their boards; these companies have aggregate market capitalization exceeding one trillion dollars, and represent about two-thirds of the companies with which engagement took place;
- 58 successful declassification proposals (listed here), with average support of 81% of votes cast; and
- Proposals by SRP-represented investors represented over 50% of all successful precatory proposals by public pension funds and over 20% of all successful precatory proposals by any proponents.
Expected Impact by End of 2014: As a result of these outcomes and the ongoing work of the SRP and SRP-represented investors, it is estimated that, by the end of 2013, the work of the SRP and SRP-represented investors will have resulted in:
- Close to 100 board declassifications by S&P 500 and Fortune 500 companies;
- Declassification of the boards of over 60% of the S&P 500 companies that had classified boards as of the beginning of 2012; and
- A decrease in the incidence of classified boards among S&P 500 companies to less than 10%.
Below are further details about these substantial results:
Shleifer and Vishny (1997) explain that “corporate governance deals with the ways in which the suppliers of finance to corporations assure themselves of getting a return on their investment.” The fundamental feature of corporate governance is shareholders’ right to elect directors to represent their interests. This shareholder representation by the board of directors is a central component of corporate governance. For corporate governance to be effective, shareholders who are dissatisfied with a board’s performance must have a mechanism to replace directors. If shareholders’ impact on electing and replacing directors is weak, so is the connection between owners and managers.
In our paper, Shareholder Democracy in Play: Career Consequences of Proxy Contests, which was recently made publicly available on SSRN, my co-author, Margarita Tsoutsoura, and I investigate whether proxy contests affect the careers of directors whose companies have been targeted. Specifically, the paper aims to shed light on whether shareholders are able impose a career cost on directors when they are dissatisfied with firm performance. This question is particularly important in today’s environment when activist shareholders often demand reforms in corporate governance. For example, the process of shareholders nominating and electing directors was at the heart of the recent (failed) proxy-access reform that was motivated by the Dodd-Frank Act. Proponents of the reform argued its necessity in increasing the power of shareholders to be able to elect or remove directors from the board (Bebchuk, 2007). On the other hand, critics of this view argued that shareholders already have tools to hold directors accountable (Bainbridge, 2006).
In a news alert released yesterday, the Shareholder Rights Project (SRP), working on behalf of eight SRP-represented investors, announced the substantial results of the work by the SRP and SRP-represented investors during the first six months of 2013, as well as the aggregate impact of their work during 2012 and 2013.
Produced Large-Scale Reforms: As a result of the work of the SRP and SRP-represented investors, 77 S&P 500 and Fortune 500 companies declassified their boards of directors during 2012 or the first half of 2013. The companies that declassified:
The New York Times published on Sunday an article on the work of the Shareholder Rights Project (SRP). The article, entitled New Momentum for Change in Corporate Board Elections, was written by New York Times columnist Gretchen Morgenson.
Based on a review of the SRP’s results and interviews with the SRP’s clients and the Director of the SRP, the article discusses the benefits produced by the SRP’s work. The article begins with the observation that “shareholder efforts that actually succeed in changing dubious corporate governance policies are so rare that when they happen, it makes you sit up and take notice;” and concludes that “[c]learly, the shareholder project is having a positive effect.” The article expresses the hope that “mutual funds would join this bandwagon or construct their own,” and suggests that “[t]he Shareholder Rights Project is a model they might want to emulate.”
The SRP is a clinical program operating at Harvard Law School. The SRP works on behalf of public pension funds and charitable organizations seeking to improve corporate governance at publicly traded companies, as well as on research and policy projects related to corporate governance.
The New York Times article stresses that the work of the SRP and its clients during the 2012 and 2013 proxy seasons has produced a large number of board declassifications at large publicly traded firms, moving these companies to annual elections for directors. The article further notes that “[a] far better approach for holding directors accountable, according to a significant body of academic research, is to make them stand for election annually.”
SRP Mid-Proxy-Season Results: 19 Boards Declassified, 13 Precatory Declassification Proposals Passed
This post describes the results produced so far during the 2013 proxy season as a result of the work that the Shareholder Rights Project (SRP) has done on behalf of SRP-represented clients. Thus far, this work has already resulted in the following 2013 outcomes:
- 19 boards of S&P 500 and Fortune 500 companies declassified following the adoption of agreed-upon management proposals at 2013 annual meetings; and
- 13 precatory proposals passed at the 2013 annual meetings of S&P 500 and Fortune 500 companies, with an average support of 78%.
Further details about these results (including lists of all the relevant S&P 500 and Fortune 500 companies) are provided below. We note that these results add to those obtained during 2012 in which the work of the SRP and SRP-represented investors resulted in: