Do Staggered Boards Matter for Firm Value?

• Published date: 01 December 2018
• DOI: http://doi.org/10.1111/jacf.12317
• Author: Markus Schmid,Steven Davidoff Solomon,Yakov Amihud
• Date: 01 December 2018

IN THIS ISSUE:

Corporate

Governance

and Short-

Termism

8Are U.S. Companies Too Short-Term Oriented? Some oughts

Steven N. Kaplan, University of Chicago

19 Who Are the Short-Termists?

Wei Jiang, Columbia University

27 Corporate Short-Termism and How It Happens

Greg Milano, Fortuna Advisors

36 e Evolution of Corporate Cash

John R. Graham, Duke University and NBER, and Mark T. Leary, Washington University

in St. Louis and NBER

61 Do Staggered Boards Matter for Firm Value?

Yakov Amihud, New York University; Markus Schmid, University of St. Gallen;

and Steven Davidoff Solomon, University of California Berkeley

78 e Market Price of Managerial Indiscretions

Brandon N. Cline, Mississippi State University; Ralph A. Walkling, Drexel University;

and Adam S. Yore, University of Missouri

89 How Have Green Companies Fared in Transactions with Banks?

A Stakeholder-Management Perspective

Dawei Jin, Zhongnan University of Economics and Law; Liuling Liu, Bowling Green State

University; Jun Ma, Tsinghua University; Haizhi Wang, Illinois Institute of Technology;

and Desheng Yin, East China Normal University

VOLUME 30

NUMBER 4

FALL 2018

APPLIED

CORPORATE FINANCE

Journal of

61

Journal of Applied Corporate Finance • Volume 30 Number 4 Fall 2018

e staggered board debate has been both heated and confron-

tational. On the one side are those forces who argue, based in

part on work by Lucian Bebchuk and Alma Cohen, that the

staggered board is value-decreasing and entrenches directors

and management.² On the other side is the exact oppo-

site argument, based in part on work by Martijn Cremers,

Lubomir Litov, and Simone Sepe—that the staggered board

instead allows directors to bargain for higher takeover premi-

ums and hence increases rm value.³ In recent years, this

debate has devolved into polemical statements from both

*This is a shortened version of an article that was originally published in the Univer-

sity of Pennsylvania Law Review, Vol._166 No._6_(2018), pp. 1445-1510. The authors

thank Manuel Adelino, Robert Bartlett, Thomas Bates, Bernard Black, Martijn Cremers,

Jill Fisch, Laurie Hodrick, Colleen Honigsberg, Robert Jackson, Jr., Marcel Kahan, and

Joe Grundfest; participants at the 2017 GSU CEAR-Finance conference and NYU/Penn

Conference on Law and Finance, Philadelphia; and the seminar audiences at WHU,

NYU, and the Hebrew University of Jerusalem for their helpful comments. We also thank

Samantha Vega for her research assistance.

1 “Wachtell Lipton Discusses the Classied Board Duels,” CLS Blue Sky Blog

(July 6, 2017), http://clsbluesky.law.columbia.edu/2017/07/06/the-classied-board-

duels/ [https://perma.cc/FW9G-7DPQ].

2 See, e.g., Lucian Bebchuk and Alma Cohen, The Costs of Entrenched Boards, 78

J. Fin. Econ. 409, 410 (2005), which nds that “staggered boards are associated with

an economically meaningful reduction in rm value.” See also Lucian Bebchuk, Alma

Cohen and Alan Ferrell, What Matters in Corporate Governance?, 22(2) Rev. Fin. Stud.

783 (2009), which nds that increases in an index of six corporate governance features

“are monotonically associated with economically signicant reductions in rm value.”

3 See K. J. Martijn J. Cremers et al., Staggered Boards and Long-Term Firm Value,

Revisited, 126 J. Fin. Econ. 422, 424 (2017), which suggests that “staggered boards

could contribute to rm value by preventing inefcient takeovers and/or ser ving to bond

a rm’s commitment to the rm’s long-term stakeholders.” See also Martijn J. Cremers

and Alan Ferrell, Thirty Years of Shareholder Rights and Firm Valuation, 69(3) J. of Fin.

1167 (2014), which nds that staggered boards are associated with higher rm value;

David F. Larcker, Gaizka Ormazabal, and Daniel J. Taylor, The Market Reaction to Corpo-

rate Governance Regulation, 101(2) J. Fin. Econ. 431 (2011), which suggests that “a

staggered board is a value-maximizing governance choice;” Thomas Bates, David

Becher, and Michael Lemmon, Board Classication and Managerial Entrenchment: Evi-

dence from the Market for Corporate Control, 87(3) J. Fin. Econ. 656 (2008), which

nds that a staggered board reduces the likelihood of receiving a takeover bid, though the

economic effect is marginal.

sides often (but not always) citing key empirical studies on

the issue. ese studies and this debate have driven recent law

review policy proposals that call, in some cases, for banning

staggered boards and, in other cases, for making staggered

boards mandatory for all companies. Studies nding nega-

tive wealth eects of staggered boards 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.

is article sorts through this debate, gives clarity to

the policy arguments, and provides an assessment of these

empirical studies. We do so by analyzing the empirical and

theoretical issues with both studies that support staggered

boards and studies that disparage them. We then conduct

our own empirical analysis and show that, contrary to the

4 For an overview of the controversy, see Brian Baxter, Spat Over Staggered Boards

Pits Wachtell Against Harvard’s Bebchuk, Am. Law Daily (Mar. 21, 2012), http://amlaw-

daily.typepad.com/amlawdaily/2012/03/wachtell-harvard-shareholder.html [https://per-

ma.cc/5HQ7-A9GY]. It has also led to allegations of illegality. See Daniel M. Gallagher

and Joseph A. Grundfest, Did Harvard Violate Federal Securities Law? The Campaign

Against Classied Boards of Directors 5-6 (Rock Ctr. for Corp. Governance at Stanford

Univ., Working Paper No. 199, 2014), https://ssrn.com/abstract=2536586 [https://

perma.cc/F467-PUT3].

5 Compare, for example, Lucian A. Bebchuk, The Myth That Insulating Boards

Serves Long-Term Value, 113 Colum. L. Rev. 1637, 1686 (2013) (which overviews “the

long-time persistence and robustness of the documented association between stronger

board insulation and poorer rm performance”), with, say, K.J. Martijn Cremers and

Simone M. Sepe, The Shareholder Value of Empowered Boards, 68 Stan. L. Rev. 67, 75

(2016) (“[W]e recommend legal reform that would transform staggered boards into a

quasi-mandatory rule.”). They have also led to proposals outside this dichotomy. See,

e.g., Martin Lipton and Steven A. Rosenblum, A New System of Corporate Governance:

The Quinquennial Election of Directors, 58 U. Chi. L. Rev. 187 (1991), which advocates

ve-year terms for corporate directors.

6 To learn more about the Project, see Shareholder Rights Project, http://www.srp.

law.harvard.edu/index.shtml [https://perma.cc/94G9-XUC5]. For an analysis of the Proj-

ect’s effects on corporate value, see K. J. Martijn Cremers and Simone M. Sepe, Board

Declassication Activism 5-6 (June 2017) (unpublished manuscript), https://ssrn.com/

abstract=2962162 [https://perma.cc/ZXK6-JBAB].

P

by Yakov Amihud, New York University, Markus Schmid, University of St. Gallen, and Steven Davidoff Solomon,

University of California Berkeley*

rofessor Lucian Bebchuk has engaged in two rounds of law-review-article duels with

Professor Martijn Cremers and Professor Simone Sepe over classied boards. The

weapons were statistics (and common sense). Cremers and Sepe wore the classied-board-

stakeholder colors; Bebchuk, the agency-model-shareholder-democracy colors. Cremers and

Sepe’s riposte was decisive. —Martin Lipton and Daniel Bulaevsky1

Do Staggered Boards Matter for Firm Value?