Declassified Boards Are More Likely to Be Diverse

Grant Bremer is a research analyst at Equilar Inc. This post is based on an Equilar publication by Mr. Bremer. Related research from the Program on Corporate Governance includes The Costs of Entrenched Boards by Lucian Bebchuk and Alma Cohen; How Do Staggered Boards Affect Shareholder Value? Evidence from a Natural Experiment by Alma Cohen and Charles C. Y. Wang; and Staggered Boards and Shareholder Value: A Reply to Amihud and Stoyanov, also by Alma Cohen and Charles C. Y. Wang (discussed on the Forum here).

The Equilar Gender Diversity Index (GDI) has reported that, at the current pace of growth in female representation on public company boards of directors, gender parity would not be reached until Q4 2055 for the Russell 3000. However, annually elected boards may already have an edge against their classified counterparts.

Classified boards, also colloquially known as staggered boards, create separate “classes” of directors who are elected for multiple-year terms, with one “class” coming up for re-election each year. Proponents of classified boards say they strengthen a company’s long-term strategy by increasing focus and dedication. Classification may also reduce stress on a board by creating job stability and preventing hostile corporate takeovers. On the other hand, advocates of declassified boards highlight how annual elections can increase accountability and responsiveness to shareholders. Over the past five years, corporations have seen a strong migration away from classified boards to annually elected boards with no director classes. Indeed, almost 90% of large-cap companies now have declassified boards, up from about two-thirds in 2011.

In the Russell 3000, boards are more evenly split. According to a recent Equilar study, more than 40% of boards were classified. Further analysis using data from the forthcoming Equilar GDI—which will publish August 2—elucidates a discrepancy between classified and declassified boards. For the Russell 3000, median prevalence of female directors for Q2 2017 in the Gender Diversity Index was 14.3% overall. However, when split into categories according to whether or not the board is classified, median prevalence differs notably—classified boards had 12.5% female directors at the median vs. 16.7% for declassified boards. The most recent data has shown that declassified boards have consistently outpaced their classified peers in female prevalence across all percentiles.

Separating companies by market capitalization provides another look into how market value may affect gender diversity. Size doesn’t mean everything, but when it comes to gender diversity company size it clearly correlates to higher female prevalence on boards overall.

Companies that fall under the mega-cap and large-cap distinctions (greater than $200 billion and between $10 and $200 billion in market cap, respectively) are both ahead of the Russell 3000 median for both classified and declassified boards. Mega-cap companies reached 27.8% female prevalence in declassified boards—notably, there were no classified boards among this group of companies. Meanwhile, large-cap companies beat the index median by 7.5 and 4.7 percentage points for classified and declassified boards, respectively, and declassified boards edged out their counterparts with 21.4% women on boards at the median.

Classified and declassified boards at mid-cap companies have the same median prevalence of gender diversity as the median index overall. Declassified boards for small-cap companies were the only group that dipped below the index median in their category, with a difference of 4.2 percentage points.

Both comments and trackbacks are currently closed.
  • Subscribe or Follow

  • Supported By:

  • Program on Corporate Governance Advisory Board

    William Ackman
    Peter Atkins
    Richard Brand
    Daniel Burch
    Jesse Cohn
    Joan Conley
    Isaac Corré
    Arthur Crozier
    Ariel Deckelbaum
    Deb DeHaas
    John Finley
    Stephen Fraidin
    Byron Georgiou
    Joseph Hall
    Jason M. Halper
    Paul Hilal
    Carl Icahn
    Jack B. Jacobs
    Paula Loop
    David Millstone
    Theodore Mirvis
    Toby Myerson
    Morton Pierce
    Barry Rosenstein
    Paul Rowe
    Marc Trevino
    Adam Weinstein
    Daniel Wolf

  • Programs Faculty & Senior Fellows

    Lucian Bebchuk
    Alon Brav
    Robert Charles Clark
    John Coates
    Alma Cohen
    Stephen M. Davis
    Allen Ferrell
    Jesse Fried
    Oliver Hart
    Ben W. Heineman, Jr.
    Scott Hirst
    Howell Jackson
    Wei Jiang
    Reinier Kraakman
    Robert Pozen
    Mark Ramseyer
    Mark Roe
    Robert Sitkoff
    Holger Spamann
    Guhan Subramanian