Classified Board is a structure of board of Directors in which the around one third of board is elected each year compare to whole new board at the Annual General Meeting. The Boards members are having a different duration according to the different classes of them. Hence, the term is called Classified Boards. Longer terms are awarded to the senior members of board. There are advantages and disadvantages of the Classified Boards.
1) It helps for the continuity of the direction and skill preservation, which will help in making long term strategy and realization of goals and objectives of companies.
2) It serves as anti-takeover measure. Hence, the board can fight back in adverse situation. Each year only one-third of board is elected which means that even after the takeover, the original or previous owners will be able the board to hear their voices. They can still have control over the company.
1) It breeds Complacency and forces to develop relations with management.
2) Boards are generally formed for the shareholders’ interest. If there is resistance during hostile takeover then, there will be reduction in the capital gains of the shareholder which will result in the loss to shareholder.
3) There will be less accountability to shareholders as the relationship between management and Board is strong. As there is a principal-Agent problem between them, the management will take decisions in their favour.