Classified boards, which divide directors into staggered classes with only one class standing for reelection annually, have long been considered a powerful defense against hostile corporate takeovers. Despite their widespread use, they remain a topic of intense debate. While studies have provided mixed evidence of whether the benefits of classified boards outweigh their costs, more recent research suggests that the costs of these governance structures may increase as firms mature. However, there has been limited investigation into how the use of classified boards evolves over a firm’s life and whether this approach has changed in response to broader shifts in the corporate governance landscape. This gap in the literature is especially relevant in light of institutional developments, such as stricter regulatory environments, enhanced information transparency, an upsurge of passive investors, and growing shareholder activism, all of which may influence when and why firms adopt or abandon classified boards.

In a forthcoming study, we examine these dynamics. We analyze the changing patterns of classified boards over the past three decades, shedding light on their implications for shareholder value. The conventional belief suggests that classified boards are disappearing from corporate America, particularly among well-established firms in the S&P 1500 Index. However, more recent findings indicate that young firms are increasingly likely to go public with a classified board and that, while the costs of having a classified board become significantly higher as firms mature, firms rarely opt to declassify their boards. We expand on these findings by examining a more comprehensive sample of firms over an extended period, uncovering new evidence of how and why the use of classified boards has evolved and its implications for shareholder value.

To explore this evolution, we used machine learning, textual analysis, and hand-collection techniques to develop a comprehensive dataset, available here, that tracks nearly all U.S. public firms from 1991 to 2020. It has three times more firm-year observations than other commercial databases do.

This dataset challenges prevailing assumptions. Among S&P 1500 firms, the prevalence of classified boards declined from 58 percent in the early 1990s to 31 percent in 2020. In contrast, the number of classified boards at firms outside the S&P 1500 rose from 42 percent to 52 percent over the same period. These findings suggest that classified boards remain a meaningful feature of corporate governance for most firms.

Importantly, our research also reveals significant changes in how classified boards are used throughout a firm’s life. In the 1990s, their use declined only slightly as firms matured. However, between 2001 and 2010, there was a more pronounced shift, with usage dropping from 65 percent among the youngest firms to 46% percent among the most mature. This trend accelerated from 2011 to 2020, falling from 73 percent for newly public firms to 33 percent for older firms. These shifts highlight the increasing dynamism of corporate governance practices as firms adapt their structures to align with changing market demands.

Several factors drive these changes. Younger firms, especially those heavily invested in innovation-driven activities such as research and development or intangible assets, often find classified boards appealing because they provide stability and protection against short-term disruptions. However, as firms age, the benefits of classified boards diminish, and the associated agency costs become more apparent. External pressures have also played a role in shaping governance practices. The rise of passive institutional investors, increased shareholder activism, and lower costs of collective action have made it easier for firms to declassify their boards. These forces have contributed to a faster and more widespread declassification process among mature firms.

The value implications of these shifts are also noteworthy. During the 1990s and 2000s, classified boards generally increased the value of younger firms but lowered the value of mature firms, leading to a “value reversal” as firms aged. By the 2010s, this pattern largely disappeared as firms adjusted their governance structures to align with shareholder interests. This evolution reflects broader changes in the corporate governance landscape, where increased scrutiny from market participants has helped reduce the frictions that had prevented firms from optimizing their board structures over their lives.

Over the past 30 years, the role of classified boards has undergone a profound transformation. No longer a static feature of corporate governance, they now represent a more dynamic tool that firms adapt to suit their needs across different stages of their lives. Our findings underscore the importance of flexibility in corporate governance, showing how firms are increasingly tailoring their board structures to align with evolving markets.

This post comes to us from professors Scott Guernsey at the University of Tennessee, Feng Guo at Iowa State University, and Tingting Liu and Matthew Serfling at the University of Tennessee. It is based on the recent paper, “Thirty Years of Change: The Evolution of Classified Boards,” forthcoming in the Journal of Finance and available here. The classified board dataset and accompanying code can be downloaded here.