http://www.law.harvard.edu/faculty/bebchuk/pdfs/03.Bebchuk-Cohen.Entrenched-Boards.pdf

The costs of entrenched boards

This paper shows that classified boards destroy value by entrenching management and reducing director effectiveness. First, I show that classified boards are associated with a significant reduction in firm value and that this holds even among complex firms, although such firms are often regarded as most likely to benefit from staggered board elections. I then examine how classified boards entrench management by focusing on CEO turnover, compensation incentives, proxy contests, and shareholder proposals. My results indicate that classified boards significantly insulate management from market discipline, thus suggesting that the observed reduction in value is due to managerial entrenchment and diminished board accountability.

Classified Boards, Firm Value, and Managerial Entrenchment

Classified boards, firm value, and managerial entrenchment☆

This paper investigates empirically how the value of publicly traded firms is affected by arrangements that protect management from removal. Staggered boards, which a majority of U.S. public companies have, substantially insulate boards from removal in either a hostile takeover or a proxy contest. We find that staggered boards are associated with an economically meaningful reduction in firm value (as measured by Tobin's Q). We also provide suggestive evidence that staggered boards bring about, and not merely reflect, an economically significant reduction in firm value. Finally, the correlation with reduced firm value is stronger for staggered boards that are established in the corporate charter (which shareholders cannot amend) than for staggered boards established in the company's bylaws (which shareholders can amend).The data on which this paper is based is available for downloading at Lucian Bebchuk's home page.

https://papers.ssrn.com/sol3/Delivery.cfm/nber_w10587.pdf?abstractid=559237

The Costs of Entrenched Boards

We investigate the effect of board governance and takeover protection on real earnings management. Four types of real earnings management are considered: sales manipulation, overproduction, the abnormal reduction of research and development (R&D) expenses, and the abnormal reduction of other discretionary expenditures. Using panel data from U.S. public firms in the post-Sarbanes–Oxley Act period, we find that the level of real earnings management (sales manipulation, abnormal declines in R&D expenses, and other discretionary expenses) increases with better board governance and decreases with higher takeover protection. These two governance factors generally have no significant effect on overproduction. We further find that firms substitute accrual-based earnings management with sales manipulation and abnormal cuts in discretionary expenses, and the substitution effect is more pronounced in firms with stronger board governance. Overall, our findings indicate that the level of real earnings management is higher when a firm is faced with tough board monitoring, and that takeover protection may reduce managerial incentives for real earnings management.

https://papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID2277998_code525622.pdf?abstractid=2277998&mirid=1

Boards, Takeover Protection, and Real Earnings Management

Corporate governance activists have become increasingly critical of classified boards. This Article examines the arguments for and against the use of classified boards, arguing that their use is not necessarily inconsistent with good corporate governance. The Article begins by reviewing the legal framework surrounding classified board, focusing on applicable (i) state corporation statutes, (ii) directors' fiduciary duties, and (iii) federal securities laws. After a review of the debate over classified boards, the Article suggest that activists' general attacks on classified boards are misplaced and that these boards may be used effectively as part of a well-run corporate governance program.

https://www.jstor.org/stable/info/40687875

Lyle G. Ganske

Papers

Corporate Governance Out of Focus: The Debate Over Classified Boards