Classified Board

What Is a Classified Board?

A classified board is a structure for a company's board of directors (BOD) in which a few directors serve for various term lengths, ordinarily of somewhere in the range of one and eight years, contingent upon their particular classification. Under a classified system, longer terms frequently granted to more senior board positions (i.e., the chair of the board). A regular classified board will have three to five classes of positions on the board, each carrying terms of service that fluctuate long, considering a faltering of elections.

Classified boards are hence a type of staggered board expected to advance great corporate governance and fight off hostile takeovers.

How Classified Boards Work

Classified boards are isolated into different "class" types, in view of the different board positions. During every election term, just a single class of positions are available to new members, subsequently stunning the number of openings accessible inside the board directorship at any one time. For instance, a company with nine board members might partition into three classes — Class 1, Class 2, and Class 3. There are normally three board members for each class.

Class 1 members serve a one-year term on the board, Class 2 members serve two years, and Class 3 members hold their seats for a very long time. This limits the board members on the ballot at whatever year, subsequently introducing an impressive impediment for any eventual hostile bidders that could look to gain control of the board.

Classified Boards as an Anti-Takeover Measure

At the point when an outside group gains control or endeavors to take over a company, they might need to stand by a number of years before being in a position to assume control over control of the board of directors when a classified board structure is in place.

With just part of the board up for election every year, this system assists with protecting a company from a hostile takeover bid by postponing the amount of time before members of the board can be replaced.

Benefits and Disadvantages of Classified Boards

The classified board structure highlights continuity of course and preservation of expertise however has gone under brutal analysis from shareholder advocacy groups for a number of reasons. Opponents to the classified structure contend that the system breeds board member complacency and powers directors to foster close relations with corporate management.

A classified board might be in a better position to effectively forestall proxy contests from a group of stockholders or activist investors who could be compelling the board on a set of activities. One more conceivable benefit of having a classified board structure is that the approach advances the stability of the board and encourages a long-term strategic vision for corporate drives. With a number of board members being guaranteed of returning on a given year — since just part of the board is up for election — this structure likewise lays out a level of continuity in management.

On the flip side, having a set of directors locked in for a while can be a negative for shareholders and employees in the event that the board pursues poor choices or is delayed to respond to a change in the business scene. Inability to use sound judgment or turn methodologies in enough time can some of the time lead to a huge drop in operating outcomes, or in a worst situation imaginable, bankrupt the business. There is likewise the moral hazard of a board of directors being less accountable to the company's shareholders in a structure where their control is more protected.

Features

• A classified board limits the number of board members on the ballot at whatever year, hence introducing a considerable obstruction for any eventual hostile bidders.
• In any case, opponents have contended that this system can breed board member complacency and powers directors to foster close relations with corporate management.
• Such a board is beneficial in light of the fact that there is guaranteed continuity of the most essential board members and advances great corporate governance.
• Classified boards utilize different "class" types to order different positions and tenure on a board of directors.