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This episode aired on Bloomberg TV on Jun 18, 2013

Staggered Board

Q. So we’ve been talking a lot about activist funds today, and I guess this is one of the defensive maneuvers boards and corporations use to protect themselves against hostile shareholder groups, maybe along with a poison pill…

A. Yes. A poison pill usually is designed to impart a financial penalty on a hostile bidder through different mechanisms. That’s one way to dissuade an activist. But what if the activist doesn’t try to buy the shares at all, and just launches a proxy battle to get the shareholders to vote for a new slate of directors chosen by the activist? That’s what staggered boards are meant to prevent.

Q. OK, so how does it work?

A. In the old days, companies had unitary boards: all the board members were up for election together, at each annual meeting. With staggered boards, they’re divided up into classes, say three, each class is only up for election every three years. That way, to get control of the board, the activist has to prevail in two different proxy contests… so, win once, wait a year, win again.

Q. And I guess with all the activists out there, this is a very popular idea?

A. It is…. I think we have a chart showing just how much money is going into activist funds these days… a lot. But also note that they took a big hit in 08, a bigger hit than most hedge funds, for 2 reasons. One, they’re one sort of fund that usually does not hedge, so when the market fell they lost more than average. Two, they, by definition, are investing in companies with less than ideal management teams. And in big downturns, there’s always a flight to quality. The combination was nasty.

Q. But its obviously gaining a lot of fans now, and we’ve heard from various allocators that activist managers are high on their lists for more investments.

A. Right, and it makes some sense: in an up market, this is a great place to look for alpha-generating managers, and even to understand why they should produce extra value.

Q. Now, back to staggered boards… does the existence of either having a staggered board or not have any impact on its share price?

A. A bit surprisingly, yes: pretty consistent data shows that companies with staggered boards don’t do as well in the market, presumably precisely because its a reasonably effective tool in preventing takeovers.