Staggered board terms

Huh? What are “staggered board terms?” They are a little understood evil that has strongly contributed to the financial crisis and resulting recession. Let me explain.

Was the financial crisis caused by poor financial institutions management decisions? Yes. Then fire the idiots! Unfortunately, that is harder than it sounds. Who has the authority to fire a poor-performing executive? The board of directors is the only entity with that power. So why don’t boards fire poor performing executives, after all, it’s their job to do so? The answer is that most boards answer to, and owe their jobs to, the executives that head the business. Huh, how is that possible? Most boards have a chairperson and that person is the most powerful member of the board. But unfortunately, that person is almost always the Chief Executive Officer of the corporation, too. In other words, the board oversees management, but the board is management. The wolves are in charge of the hen house. What’s more, the chairperson is frequently relied upon to make board recommendations anytime that there is a vacant board of directors slot. This means that the board of directors is usually composed of folks who are amenable to the management of a business. Thus, boards, in practice, answer to management.

But to whom are boards of directors accountable? Supposedly to shareholders. Shareholders should have the unquestioned ability to nominate and elect the board of directors as they see fit. So why then aren’t more board members fired? The answer is, you guessed it, staggered board terms. Staggered board terms mean that only a small minority of board members are up for election in any given year, say 2 of 13 board members. This means that an interested group of shareholders would have to wait 4 years to get in place a favorable board whose majority vote could oust management. The math is as follows on a 13 person board…a majority is 7 votes and 7 divided by 2 members up for re-election each year = 3.5 years of votes…or 4 years of votes.

Unfortunately, it is very, very expensive for a single shareholder, even a deep-pocketed one, to contact very shareholder of record of a corporation. Imagine the cost of legally preparing a shareholder resolution, printing it, and then mailing it out to thousands or millions of shareholders each year for four years! And even then you may not win because the management of the business and the crony board members will be fighting you every step along the way! They will say: “This rogue shareholder is interested in taking over your company and running the company for their own personal gain and not the welfare of all shareholders!” Also disgustingly, the corporation can use corporate dollars to fight its own owners/shareholders! Don’t believe me? This sort of thing happens every single year in corporate America.

Also, most U.S. publicly traded corporations are 60-80% owned by institutions, such as mutual funds, pension funds and insurance companies. Typically their response to bad management is to simply sell their shares of stock in the company and move on to the next investment opportunity. After all, when you invest in a mutual fund, do you want them to spend millions of your dollars fighting a proxy fight with an entrenched management? Of course not.

The root of the problem is “staggered board terms” which dramatically multiply the cost of ousting bad management from a business. Thus, amongst all of the changes we should all be fighting for and paying attention to are the elimination of “staggered board terms.” Additionally,
another change that would be welcome is that shareholders who are among the top 10 largest shareholders should legally be allowed to use the corporations dollars to promote a proxy position up to a certain dollar amount. That amount could be defined as: the cost to print and mail out a letter to each shareholders. That would prevent jackasses from raiding the corporate coffers for personal gain.

Does all of this make sense? Staggered board terms are one of those innocuous technicalities that slip under most people’s radar screens that, nonetheless, result in great evil being wrought upon investors.

Smiles!

Jason