Robert M. Daines: Can Staggered Boards Improve Value?
On December 15, 2020, Prof. Robert M. Daines, Global Chair Scholar at PKULS, Associate Dean of Stanford Law School, Pritzker professor in Law, and senior research fellow at the Rock Center for Corporate Governance, presented "Can Staggered Boards Improve Value?” The lecture was delivered online, hosted by Li Huxing, a postdoctoral researcher at PKULS, and attended by nearly 100 students and faculty members from inside and outside the university.
Robert M. Daines’s research focuses on the intersection between law and finance, including CEO pay, corporate governance, mergers and acquisitions, mandatory disclosure regulations, IPOs, shareholder voting and takeover defenses. Professor Daines’s work has appeared in such top publications as the Journal of Financial Economics, the Journal of Financial and Quantitative Analysis, the Journal of Law, Economics and Organization and The Yale Law Journal. His research has also been covered by The Economist, The New York Times, The Wall Street Journal, Financial Times, Forbes, Fortune and other media. Before entering academia, he was an investment banker at Goldman Sachs, where he advised firms on bank and bond financings. He clerked for Judge Ralph K. Winter of the U.S. Court of Appeals for the Second Circuit. Prof. Daines was awarded the 2012 John Bingham Hurlbut Award for Excellence in Teaching.
This article presents the exchange and dialogue among scholars in the form of textual transcripts.
Robert M. Daines: In the United States, the law gives the board of directors broad authority over the affairs of the corporation. For example, Delaware, the state of incorporation chosen by 70 percent of the nation's the listed companies, provides in its general corporate law that the operations and affairs of the corporation shall be managed by the board of directors. In matters involving whether directors have breached their fiduciary duties, courts have tried to avoid evaluating directors' actions after the fact, unless there is a conflict between the relevant director's actions and the interests of the corporation. Given the tremendous influence that directors have on a company, the selection of those who serve as directors, how compensation is designed, and how the activities of their office are organized all become critical issues. The topic of this talk focuses on one of these issues: whether to make it easier to dismiss directors.
If one considers that directors may deviate from the interests of shareholders by pursuing their personal interests, one might conclude that more convenient dismissal methods are needed to motivate directors to work in the interests of shareholders. If one considers that there would be more the business decision-making expertises of directors compared to shareholders, one might argue for higher thresholds for dismissing directors. The issue of dismissal of directors is of great importance in the United States, as control of the listed company usually requires re-election of the board of directors. In terms of director tenure rules, U.S. companies can be divided into two categories, one in which all directors' terms begin and end at the same time, so that all directors may be re-elected each year. The other is called a staggered board, in which directors are divided into groups and each group has a staggered term, so that only some of the directors are re-elected at a regular annual meeting of shareholders.
The adoption of staggered-term boards has generated considerable controversy: Staggered-term provisions make it more difficult to re-elect directors, raising concerns about whether they may foster incentives for directors to deviate from shareholder interests and increase agency costs. The results of existing studies largely support this view. For example, The listed companise with staggered-term boards (1) lower Tobin's Q or market capitalization (Bebchuk and Cohen，JFE 2005；Cohen and Wang, JFE 2013; Guo et al. JCF, 2008; but Cremers et al.); (2) M&A decisions are worse (Masulis, JF 2007); (3) the disciplinary mechanism on directors is weaker (Faleye, JFE 2007). However, the aforementioned study suffers from at least three shortcomings. First, it only reveals the correlation, not the causality, between the adoption of staggered-term board practices and other variables. Second, it ignores the possibility of a heterogeneous effect of the same corporate governance rule on different firms. Third, it fails to explain the fact that numerous firms adopt staggered-term boards of directors in their initial public offerings.
Massachusetts' 1990 amendment to its corporate law (House Bill 5556) provided a rare and natural setting for experimentation to fill the gap in prior research. This amendment forced all corporations incorporated in the state to adopt staggered-term boards of directors. The study with my co-authors used the period 1984 to 1997 as the sample period, and selected Massachusetts corporations that adopted staggered-term boards as a result of the 1990 amendment as the experimental group, and non-Massachusetts-incorporated corporations that did not adopt staggered-term boards as the reference group. we used the Difference-in-Difference method to measure the causal relationship between the adoption of a staggered board and changes in firm value (with Tobin's Q as a proxy variable). The regression results show that there is the causal relationship described above exists and is statistically significant (at the 1% level) firstly. Second, this effect is heterogeneous across firms. Third, we test the effect that the adoption of staggered-term boards may have on management behavior, and the results show that the adoption of staggered-term boards helps to increase the corporate value of young innovative firms.
Li Huxing: Pairing staggered terms with sunset provisions can match the life cycle of a company, helping directors avoid short-sighted investor pressure over time and make decisions based on long-term value, while also limiting the duration of negative effects. Functionally, it is very similar to a two-tier equity structure with a sunset clause. In addition, directors of not only start-ups but also mature companies may need to use staggered terms to avoid short-term investor pressure and make long-term value-based decisions. However, the reality in the U.S. is that institutional investors and shareholder voting advisory bodies are generally opposed to the use of staggered term boards in mature companies, which may confirm that the degree of information asymmetry is an important factor in the legitimacy of staggered term boards.
Translated by: Liu Chuantai
Edited by: Wu Yunkai