IN-DEPTH: Investors ramp up board declassification efforts as governance returns to forefront
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Staggered boards are having a moment, with ESG-oriented shareholders and financially-driven activist investors making more declassification demands so far this year.
The first four months of 2025 have seen 22 U.S.-based classified boards face calls to eliminate the structure according to Diligent Market Intelligence (DMI) Activism data, up from eight such demands in the same period in 2024.
Such shareholder demands have resonated with investors in recent years, securing an average 62% backing at U.S.-based companies in both 2024 and 2023, DMI Voting data show.
With only a third of the board composition available to turn over in any given year, the structure is often viewed as an entrenching mechanism that is negatively related to company performance.
“If you find out a particular director is overboarded or is over a certain age or is on the audit committee and there is an audit problem, you do not want to have to wait up to three years to vote against him or her,” said John Chevedden, a veteran shareholder advocate on the issue who has led declassification campaigns at S&P 500 targets since the 1990s.
Many years of campaigns have rendered the structure far less common than they were two decades ago - particularly among bigger companies, with just 11% of the S&P 500 having the provision in place. According to DMI Governance data, 1,143 Russell 3000 companies have a staggered board provision.
"Shareholder pressure has helped persuade big companies that it is worth having annual elections to show that directors are going to be more careful about their performance,” Chevedden told DMI, adding that corporate scandals and governance issues around the time of the global financial crisis in 2008 helped add impetus to reformists’ campaigns.
"In the S&P 500 firms, we have seen the near extinction of staggered boards,” said Harvard Business School Tandon Family Professor of Business Administration Charles Wang. “In 2000, 60% of the 500 had a staggered board,” he recalled. "That number is closer to 10% now."
This season's proponents
Chevedden is behind five declassification demands as of April 30, including at S&P 500 companies Keysight Technologies and Agilent Technologies, where shareholders gave overwhelming support to the non-binding proposals in March.
The opening months of 2025 have also seen many financial-focused activists also target the structure as a governance hook as part of broader campaigns. That may be a result of specific sectors richer in staggered boards, including funds, technology, and energy companies, increasingly being targeted by activists as well as a return to governance complaints after environmental and diversity angles rose in popularity.
It's “one of the cudgels they [activists] can use to try to move management toward a broader set of changes, a means to an end,” said Wang.
Elliott Management advanced a declassification demand via a 14-4a shareholder proposal at S&P 500 company Phillips 66, as part of its argument that CEO Mark Lashier wields “undue influence” over the U.S. oil company’s staggered board. Given the company’s multiple failed attempts of its own to reach the 80% of outstanding shares threshold to declassify, the activist added a unique twist requiring directors to issue letters of resignation in advance of each annual meeting without the need to amend the charter. Phillips 66 and some observers considered the proposal illegal. It failed at the May 21 vote.
At Medallion Financial, ZimCal Asset Management took a similar approach advancing the demand in January and following up with a three-person slate to target the eight-person staggered board.
Another situation saw Gate City Capital Management address its governance concerns at Intrepid Potash by formally advancing a declassification proposal in February. A month earlier, the activist had demanded bigger shareholder payouts, reduced overheads, and new directors with “meaningful” holdings in the fertilizer company.
Saba Capital Management has also joined the fray, opting to pursue the staggered board structure of six closed-end funds in Q1, some of them board representation targets for Saba the previous year.
An open goal?
Declassification is expected to remain a key theme in the corporate governance landscape with Chevedden for one viewing the issue as second only to implementing simple majority votes.
For others, it may be more of a means to an end. Anson Funds abandoned its demand for Match Group to declassify as part of a settlement that saw the dating app platform add a new director to its board and agree to share information with the activist investor.
And despite their unpopularity with those shareholders who do not want to endure a three-year wait for a vote on perceived poor performers, the structure is expected to continue to be adopted by new entrants to public markets, especially in start-up heavy fields such as information technology and generative artificial intelligence.
“Without the pressure of having to be reelected every year, you can take a longer-term approach,” said Douglas Chia, president of Soundboard Governance. “If you are a first-time director, it gives you a couple years to understand the particular challenges facing a company and also the corporate culture.”
