Settling the Staggered Board Debate

There are two starkly different sides to the heated debate over staggered boards. On one are those who argue, based in part on work by Professors Lucian Bebchuk and Alma Cohen, that the staggered board is value decreasing because it enables the entrenchment of inefficient directors and management. On the other side are proponents of the exact opposite argument, based in part on work by Professors Martijn Cremers, Lubomir Litov, and Simone Sepe and on the views of lawyer Martin Lipton, that the staggered board increases firm value because it allows directors to bargain for higher takeover premiums and to have an undisturbed long-term investment strategy. These important and careful studies and this debate have driven recent law review policy proposals calling for either banning the staggered board or making it mandatory for all companies. Studies finding negative wealth effects of a staggered board have also undergirded a campaign by the Harvard Law School Shareholder Rights Project to push publicly-traded companies in the S&P 500 to eliminate their staggered boards.

In Settling the Staggered Board Debate, forthcoming in the University of Pennsylvania Law Review, we show that, empirically, neither side of the debate is right. The article gives clarity to the policy arguments and provides novel estimation results on the effects of a staggered board on firm value. Our empirical analysis builds on prior studies employing different estimations and shows that, contrary to the prior, major studies, a staggered board has no significant effect on firm value.

Those studies, including one by professors Bebchuk and Cohen, do not include important explanatory variables in their analyses that affect firm value and at the same time are correlated with the presence or absence of a staggered board. As a result, the studies have inappropriately attributed a lower firm value to the presence of the staggered board instead of to these omitted variables. Using data compiled by Institutional Shareholder Services and its predecessors, we examine the effect of a staggered board on up to 2,961 firms over 23 years for a total of up to 27,016 firm-years. Our initial results, using the model in the prominent study by Bebchuk and Cohen, show that firm value is negatively affected by a staggered board, which is consistent with their results even though their study ended in 2002 while ours ends in 2013. However, the effect of a staggered board becomes insignificant once related explanatory variables are included in our analysis. In particular, we find that the link between negative firm value and a staggered board becomes insignificant once we include in the model an entrenchment index of other corporate governance measures developed by Bebchuk, Cohen, and Ferrell. The index is positively correlated with the incidence of the firm having a staggered board and itself has strong negative effect on firm value. This leads to the conclusion that the effects of a staggered board on firm value are driven by other variables and not by the staggered board itself.

We next turn to studies that have shown that the staggered board enhances value, focusing on the most prominent, that of Cremers, Litov, and Sepe. Their study differs from Bebchuk and Cohen’s in that it controls for unobserved firm characteristics by including in the model firm fixed effects. Replicating this study’s methodology, we find similar results. However, given that our sample spans 23 years (1991-2013), and firm fixed effects are by definition constant over this period, it is unlikely that all firms have invariable characteristics for that long. Rather, we know that some firms choose to stagger their boards and other firms decide to de-stagger their boards. It is likely that some firms make these decisions because there have been changes in unobserved characteristics and conditions over time. We therefore split the sample into two sub-periods and estimate the model for each sub-period, which allows for the firm fixed effects to vary. We find that a staggered board has no significant effect on firm value in any of the two sub-periods.

Our results thus find shortcomings in both sides of the debate. They also highlight the sensitivity of any analysis of the staggered board and firm value to the choice of variables and models and to the empirical methodology used. Given that earlier views in this debate are based on empirical results, our results show that neither view is robust to changes in the empirical specification of the model and the estimation methodology used.

We also address the fact that having a staggered board – its adoption, retention, or removal – is a result of a decision made by the firm. In other words, the estimated effect of a staggered board may reflect the consequences of the factors that led to the decision rather than the presence or absence of a staggered board. We correct for this problem by employing an instrumental variable estimation method. In this analysis, we find that the value effect of a staggered board becomes insignificantly different from zero.

Our analysis means that no definitive conclusion can yet be made about the positive or negative wealth effects of a staggered board, nor can there be policy recommendations applicable to all firms. As for efforts to require or prohibit staggered boards, our results suggest caution. We find that any value in staggered boards appears to depend on the factors that prompted a firm to adopt, retain, or remove a staggered board provision but that cannot be fully observed by researchers or quantified for the purpose of research. We highlight the theory that the staggered board is endogenous, and that the decision to adopt (or not) the staggered board is unique to each firm and its characteristics. A staggered board may enhance value in some firms but destroy it in others. Therefore, the battle over the staggered board must be fought over each individual firm and decided by whether it is appropriate for that firm.

This post comes to us from Professor Yakov Amihud at New York University’s Stern School of Business, Professor Markus M. Schmid at the University of St. Gallen, and Professor Steven Davidoff Solomon at the University of California, Berkeley’s School of Law. It is based on their recent article, “Settling the Staggered Board Debate,” available here.