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Declassification

Declassification

Definition

Declassification — a corporate governance term, referring to a board of directors in which all directors stand for reelection in the same year. Conversely, a classified board, in which directors serve "staggered" terms, is one in which only some directors are up for reelection in any given year.

According to several corporate governance studies, there is an association between staggered boards and "lower firm value and/or worse corporate decision-making." More specifically, research has shown that (1) staggered boards reduce a firm's value, and, (2) in the context of hostile takeovers, staggered boards operate as a takeover defense, which entrenches management, discourages potential acquirers, and delivers a lower return to shareholders. In contrast, declassified boards raise a board's level of accountability because declassification allows shareholders to respond more quickly (with their votes) if a current board of directors' decisions and actions do not appear favorable to shareholders' interests.

Perhaps in response to such findings, during the past decade, the boards of publicly held corporations are becoming increasingly declassified.

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