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FORTUNE.COM // MAY.1.19
These figures may represent what econo-
mists call “survivorship bias”: A company
that’s reaping lousy returns with a staggered
board is more likely to ditch it. Still, more
nuanced studies also suggest that the structure
can pay off. Researchers Martijn Cremers,
Lubomir Litov, and Simone Sepe looked at
more than 3,000 companies that changed
their boards from staggered to unstaggered or
vice versa from 1978 to 2015. They found that
those companies’ “firm values” increased by
3.2% to 6.1% under a staggered structure, as
measured by Tobin’s Q, a metric that divides
a company’s enterprise value by the value of
its assets. Similarly, Harvard Business School
professor Charles Wang and his coauthors
evaluated companies headquartered in Massa-
chusetts that were required to adopt staggered
voting in 1990, owing to a change in state law.
In the 15 years that followed, Wang found,
their average Tobin’s Q value grew sharply.
What makes staggering a secret sauce? It
appears to make it easier for good manag-
ers to innovate, free of outside pressure.
Wang’s research found that businesses that
spend heavily on R&D tend to perform better
under alternating-election boards. “External
influence is more likely bad for these types
of innovative activities,” says Wang, because
shareholders may lean on management for
short-term results rather than giving an
investment with a long time-horizon the sup-
port it needs. (Tellingly, of today’s staggered
S&P 500 companies, 16 of 54 are in health
care, including biotech and pharmaceuticals.)
IT ’S POTENTIALLY A GOOD SIGN that companies
launching initial public offerings are increas-
ingly likely to have staggered boards. In 2008,
38% of IPO companies had such structures;
in 2016 that figure was 81%. (This year’s
best-known IPO debutant so far, ride-share
company Lyft, has a staggered board.)
Still, investors shouldn’t assume stagger-
ing is a panacea. Building a moat around the
board, says Wang, can have negative conse-
quences as well, if companies use staggering
to insulate themselves from justified criti-
cism. (Dual-class share structures, which give
“super voting” rights to executives and found-
ers, present even greater risks; see sidebar.)
An unstaggered board can make it easier for
investors to press for change if management
starts to drastically disappoint.
Here are three companies that
are in the middle of solid runs un-
der staggered boards—and have so
far avoided the moat mentality.
Few brick-and-mortar retailers
have thrived in the e-commerce era
like Ulta Beauty (ULTA, $354). Backed
by a staggered board, CEO Mary
Dillon has targeted “off-mall” loca-
tions like strip malls, which haven’t
lost traffic as traditional malls have.
Ulta has opened 313 new locations
over the past three years, about
27% of its store count. It also em-
phasizes in-store experiences that
online rivals can’t match, including
exclusive products and sit-down
“beauty bars.” “We’re very bullish on
the company’s prospects,” says Op-
penheimer analyst Rupesh Parikh,
who says the stock trades in line
with historical averages, despite
climbing 67% over the past year.
For the past decade, health insurer
Anthem (ANTM, $293) outsourced its
pharmacy benefits management
(PBM) services to Express Scripts.
That deal ended in March, and now
Anthem is launching its own PBM
service, a long-term strategic leap
with benefits that management
believes will far outweigh the risks.
Barclays analyst Steven Valiquette
says the move will give Anthem
room to grow revenues between
10% and 12% annually over the
next three to five years.
IDEXX Laboratories (IDXX, $228),
a leader in veterinary diagnostics,
has benefited from our willingness
to spend on our pets’ wellness. It
also accounts for as much as 80%
of the animal-health diagnostic
market’s R&D spending, driv-
ing “almost all innovation in the
industry,” says Mark Massaro, an
analyst at Can accord Genuity. The
company boasts customer retention
rates near 99%. Its stock is pricey,
having jumped 183% over the past
three years, but it deserves to trade
at a premium, says Massaro.[FB, $176]
Founder and CEO
Mark Zuckerberg
controls about 60%
of the shareholder
vote through power-
ful B shares. That
control has helped
Facebook take prof-
itable risks. It also
insulates Zuckerberg
from investor pres-
sure as he battles
questions about data
security and privacy.ESTÉE LAUDER
[EL, $164]
The Lauder family
controls 87% of
shareholder voting
po w er. T he y ’v e
shown a willingness
to trust strong lead-
ers like CEO Fabrizio
Freda. But with fam-
ily also accounting
for 25% of the board,
it’s clear where the
final decisions lie.UNIVERSAL
HEALTH SERVICES
[UHS, $135]
The hospital opera-
tor’s A and C shares,
which account for
87% of voting power,
are largely controlled
by founder and CEO
Alan Miller and his
family. The stock has
sharply underper-
formed the S&P 500
Health Care Index in
recent years; any big
course correction is
in Miller’s hands.DU A L- C L A S S
DILEMMA
These companies
may have bright
futures, but the
voting control their
“dual-class” stock
gives to their found-
ers can make other
investors uneasy.