BPM
Search

Can a Staggered Board hurt Financial Reporting?

12.13.16

According to recent research, a staggered board structure tends to decrease shareholder influence over a company’s audit committee, which has a negative impact on the committee’s accountability and responsiveness. The results of the study — “The Efficacy of Shareholder Voting in Staggered and Non-Staggered Boards: The Case of Audit Committee Elections,” published in the American Accounting Association’s May issue of Auditing: A Journal of Practice & Theory — reinforce the positive impact of nonstaggered boards on a company’s financial reporting.

Study supports trend to destagger boards

According to the study’s authors, the nonresponsiveness of staggered audit committees helps explain previous research showing weaker performance among companies with staggered boards. Their results, they say, support a movement in recent years to destagger boards.

In a typical staggered board structure, boards elect directors to three-year terms, and only one-third of directors are up for re-election in a given year. This structure makes it difficult to gain control of the board, so it can be a powerful antitakeover strategy. But as research continues to emerge showing the negative impact of staggered boards, an increasing number of companies are returning to a nonstaggered board structure, in which directors face re-election annually.

Highlights of the study

The authors theorize that directors on staggered boards don’t necessarily face re-election following poor performance and, in fact, the structure insulates directors from shareholder scrutiny. This may influence directors’ accountability and responsiveness and diminish the effectiveness of shareholder votes. It’s analogous to public officials, who tend to be more responsive to their constituents when their terms are shorter.

The results of the study support this theory. For example, at companies with nonstaggered boards, low shareholder votes often result in:

  • The departure of accounting financial experts (AFEs) from the audit committee followed by replacement with another AFE,
  • An increase in frequency of audit committee meetings, and
  • The audit committee’s reduction of auditor-provided nonaudit services.

In other words, in companies with nonstaggered boards, low shareholder approval is associated with changes in audit committee composition, improvements in audit committee diligence and efforts by the audit committee to improve financial reporting quality. These associations weren’t evident at companies with staggered boards.

Give shareholders a voice

One of the most effective ways for shareholders to voice their opinions is by voting in director elections. The study shows that audit committees at companies with staggered boards are less likely to respond to low shareholder approval rates by taking steps to improve their performance.