Why Do Managers Dismantle Staggered Boards?

Abstract:     
Staggered boards offer incumbent management considerable protection from hostile takeovers and proxy fights. However, in the last few years, managers of an increasing number of firms have voluntarily destaggered their boards, exposing themselves to the risk of being removed from office. This paper investigates why managers decide to destagger their boards. I find statistically significant evidence that the likelihood of destaggering increases with shareholder pressure (in the form of precatory shareholder resolutions seeking destaggered boards) and with the amount of the CEO's unvested (including out-of-the-money) options. I do not find evidence of a strong connection between the decision to destagger and firm performance, or other CEO characteristics, including other forms of compensation such as unrestricted equity. The study provides insight into the informal power and influence of shareholders over the board, and the role of equity and monetary compensation in aligning management's interests with those of the shareholders.

Keywords: Staggered boards, Corporate governance, Agency costs, Boards, Directors, Takeovers, Antitakeover, Compensation, Regression, Options

JEL Classifications: G30, G34, K22

Working Paper Series