New Study Flips Time-Honored Belief that Full Annual Board Elections Help Companies Thrive
March 26, 2014
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. R
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at least two-thirds old guard; since those businesses can’t sweep the boardroom, their valuations are held prisoner to outdated thinking.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.