Question

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A classified board of directors is typically separated into classes. Each class serves staggered term lengths before running for re-election. In a declassified board of directors, all members are re-elected annually (Kim, 2016). Investors prefer a declassified board of directors as members are held more accountable for their decisions. Declassified board members tend to be more receptive to the wishes of shareholders. The annual re-elections can help prevent governing entrenchment. Governing entrenchment can be detrimental to a firm because members act with only their self-interest in mind. The popularity of declassified boards has risen among large cap firms with nearly 90% adopting the declassified board system (Bremer, 2017). A classified board system has been proven to focus more on a firm’s long-term gains over short-term profits. Often, members of a declassified board will focus only on short-term profits which can have a negative long-term impact on the firm. Since members serve longer terms, classified boards provide job stability which can prevent hostile takeovers. The longer terms also instills a feeling of commitment to the firm and increases concentration among members. Board members are given the opportunity to build a knowledgeable background of the firm. A board member with knowledge of the firm’s past can be an asset when making future decisions (Bremer, 2017).

Answer 1

I am giving you some pointers below. Please use the same, add some more meat based on your understanding and then respond.

The classification of a corporate board of directors is a crucial decision for the organization and its investors. It's a reflection of the corporate governance the firm has undertaken.

Each method of board governance has inherent merits and demerits for both the firm and firm’s investors and the same had been debated a lot in the corporate circles.

A classified board

• Provides organizational advantages for shareholders
• Leads to long term view by the management
• provides job stability and works to prevent hostile takeovers (Bremer, 2017).
• Since the term length varies, there is a reduced pressure on board members,
• Leads to permanency
• Leads to the reinformcement of long-term strategy of the firm
• Has Concentration and committment by the directors
• Classified boards results in a “significant” reduction in firm value (Bebchuk and Cohen, 2009).

However, investors usually prefer declassified board of directors. And there are several reaosns for the same.

• Board members are held accountable and receptive to shareholders (Bremer, 2017).
• Declassification assists in preventing governing entrenchment.
• Declassified boards are likely to be more diverse
• Can bring competitive advantage for the organization and the long-term value for the shareholders