Question

Many firms have been under pressure to declassify their boards of directors. Why would investors want a board to be declassified? What are the advantages of a classified board?

Answer 1

Investors prefer the board of directors to be declassified where all the board of directors are elected annually. Investors prefer a declassified board for increasing the accountability and responsiveness of the board of directors towards the stakeholders of the company.

The primary responsibility of the board of directors is to protect the interests of the shareholders. Having a declassified board where no class has a permanent place, helps protect the interests of the stakeholders.

There are 3 classes of the board of directors. In case of a declassified board of directors, all three classes are open for election annually and in the case of declassified only one class is open for elections.

The advantages of a classified board, where one only one class of the board directors open for elections  is :

• Frequent elections does not allow the organization to focus on the goals of the organization. So, a classified boards helps the organization focus completely on it's long term goals and not not elections.
• It promotes stability in the organization and improves the dedication of the members in the company.
• As the board of directors are changed annually, it consumes a lot of time and cost to impart training to the new elected board. So, having elections after a span of time helps reduce costs and saves time.
• The attempts to takeover a firm is minimized when elections are held only after a gap of a few years. It helps prevent hostile takeovers.