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FORTUNE.COM // MAY.1.19
THE ETERNAL BATTLE for control
at public companies between
executives and shareholders is one of the most
important narratives in business. And on
one front, shareholders have won decisively:
They’ve sharply reduced the use of “staggered”
boards of directors, which can help protect
business leaders from the pressures of reform-
minded investors.
But in winning the victory, did they lose the
war? Seems so. Staggered boards may actually
deliver better returns.
A staggered board is like the U.S. Senate: Di-
rectors are elected on a rotating basis, typically
with one out of three facing election each year.
A non-staggered board is more like the House:
Every seat is up for grabs in each election. With
a Senate-like structure, it takes two
elections to replace a majority of
the board—making it far more dif-
ficult for shareholders to oust direc-
tors and demand a shift in strategy.
In 2009, 41% of S&P 500 boards
used such setups. Today, only 54
companies in that index, or 11%,
have non-annual voting, accord-
ing to FactSet. For that sea change,
you can partly thank Enron and
WorldCom. The corruption-driven
collapses of those companies made
corporate-governance reform a
cause célèbre—and the perceived
coziness of staggered boards made
them an easy target. Research at
the time also suggested that firms
that reelected all directors annually
were better performers. By the early
2010s, shareholder-rights advo-
cates were lobbying against stag-
gering, on the grounds that it hurt
value by shielding bad managers.
Their efforts helped persuade more
than 100 companies to abandon
the practice.
But in recent years, staggered-
board companies have wound up
outperforming their peers—and
significantly at that. For the five
years through March, S&P 500
companies that utilized non-annual
voting registered an average total
return of 125%; for the index as a
whole, the figure was 52%.
INVEST
At the few companies with “staggered” boards,
shareholders can replace only a few directors at a
time. Here’s why that continuity has paid off for
investors. By Ryan Derousseau
WHEN A SHUFFLED
DECK MEANS
A BETTER HAND
ILLUSTRATION BY MICHAEL GEORGE HADDAD
