New Study Flips Time-Honored Belief that Full Annual Board Elections Help Companies Thrive

TUCSON,  Ariz. – March 26, 2014 – Want to boost your company’s value? Just say  no to annual board elections. That’s the simplified takeaway — bucking  years of  conventional wisdom — from a new study by the University of Arizona’s  Eller College of Management and James E. Rogers College of Law, and  Notre Dame’s Mendoza College of Business. 

The  study, “Staggered Boards and Firm Value, Revisited” was just recognized  with a best paper award at the 2014 Delaware Corporate Governance  Symposium.

Higher Valuations Linked to Adopting Staggered Elections

Companies  take two paths when it comes to how they elect board members. Some put  every seat up for grab annually while others stagger elections, putting  just  a third of members to the vote each year. Consultants have long advised  against staggering, and with good reason: Studies have consistently  shown that companies staggering their elections are worth less.

The  reasoning behind the findings goes like this: When firms struggle, they  need new ideas, but staggered elections lock them in to a board at  least two-thirds  old guard; since those businesses can’t sweep the boardroom, their  valuations are held prisoner to outdated thinking.

Here’s  the catch: Earlier inquires have only looked at a cross-section of  companies at a point in time. For this study, researchers applied a  thornier methodology  others have skirted, looking at changes over time, i.e., when  companies switched from full elections to staggered, did their values go  up or down? Surprise: in aggregate, they went up. Not only that, but  firms that made the opposite change, from staggered  to full elections, tended to lose value over time.

Are Quick-Win Shareholders Killing Innovation?

While  the methodology doesn’t allow absolute statements about cause and  effect, the study sheds light on what seems to be a long-held mistake:  assuming that  staggered boards caused lower performance and valuations. In fact, data  show that low valuations were often precursors to firms moving away  from full elections and realizing more success. “Staggering decisions  could be partly motivated by—rather than the cause  of—low firm values,” researchers suggest.

The  data also show that associations between increased valuation and moving  to staggered elections were strongest among companies with more  incentives to take  on risk and complex, long-term investments, such as firms that rely on  research and development — initiatives for which shortsightedness can be  deadly.

Taken  together, these findings suggest that full annual elections may leave  companies open to myopic decisions by an influx of opportunistic new  members. Thus,  companies that rely on innovation should consider whether staggered  boards, which are likely to be more informed, can better insulate  against shareholder pressure for quick-win profits and instead promote  greater long-term success.

Notre  Dame’s Martijn Cremers and the UA’s Lubomir P. Litov and Simone M. Sepe  examined valuations of American publicly traded companies from 1978  through 2011  for the study. Findings were covered in December by the Wall Street Journal, and the full report is available at http://tinyurl.com/eller-staggeredboards.