[original post removed]
Classified boards have multiple classes of directors (typically three). If there are “n” classes, each class comes up for reappoinment only once every “n” years. So, in a classified board with three classes, it would take three years to totally replace the board.
This is generally viewed as a bad governance practice, because it insulates the board from being replaced for bad performance (or alternately, allows board members that are in management’s pocket to stick around longer). One study showed that no firm with a classified board had been successfully taken over in a hostile takeover in something like 15 or 20 years.
If the firm wasn’t taken over in a hostile takeover, then shouldn’t it count for a good coirp governance policy?
Blackjack - we generally look at hostile takeovers as a means of limiting agency problems. If teh management does too bad/self-serving a job, a hostile bidder can buy the company on the cheap, fire the bums, institute better practices, and reap the gains. So, the theory is that the threat of takeovers keeps management on their toes - makes them work hardere for shareholders and keep the stock price up.
A classified board insulates management from this pressure. There’s also a fair bit of evidence in the academic literature that firms with classified boards have lower valuations.
thnx 