Rather than having the entire board up for election at once, a classified board of directors is a structure for a board of directors where the directors serve terms that vary. This structure can help shield the business from hostile takeovers because it would be difficult for a prospective buyer to quickly replace the entire board.
What a Classified Board of Directors Is and Is Not
A corporate governance structure called the Classified Board of Directors is employed to oversee an organization’s operations. It entails dividing the directors of the board into smaller classes, each with a distinct term limit. The company has three classes of directors, each of which is elected for a single year and is eligible for reelection at the conclusion of its term. This type of staggered board typically has three terms. This structure benefits shareholder rights and helps to guarantee greater continuity in oversight and decision-making.
Benefits and Drawbacks of a Classified Board
Having a Classified Board of Directors has various benefits. The most significant benefit is that it gives corporate governance a layer of stability and continuity because directors serve out their terms in office rather than being replaced all at once. Smaller shareholders can also become more influential on the board because they are aware that their class of directors will be kept on for the duration of their terms in office. Furthermore, because some of the changes that would occur if all members were replaced annually are eliminated, the structure allows the board more time to consider options and make decisions.
A classified board of directors may, however, have certain drawbacks. Longer terms may increase the likelihood of insider knowledge because directors may grow more accustomed to their roles. Furthermore, because of their increased security in their roles, directors may feel more at ease making decisions that affect management. Finally, if a board is classified, shareholders may feel helpless to challenge board decisions because their renewed influence may be restricted to a single class, while the other classes have established votes that have been in place for a longer period of time.
The Classified Board’s Shareholders’ Role
A classified board of directors is heavily influenced by its shareholders. They are able to choose the class of directors they think will act in their best interests. Additionally, since shareholders’ opinions can be very helpful in decision-making, it is critical that they are aware of the board’s aims and objectives.
The longer terms of a classified board are advantageous to shareholders as well, since directors who stay in office are more likely to gain a deeper understanding of the business and share that knowledge with shareholders when making decisions. Furthermore, by supporting candidates who share their vision for the company and advocating for changes when needed, the structure gives shareholders an opportunity to shape the course of a business.