What Is a Classified Board of Directors?

A classified board has multiple classes of board members, typically three. Each class has a different term length, generally from one to five years. Thus, a classified board of directors definition refers specifically to a board with different classes of directors.

What is a Classified Board of Directors?

The classified board of directors meaning includes having directors with overlapping terms that vary in length so that not all of the directors terms end at the same time. Thus, elections for board members are spaced out or staggered. 

Because a classified board of directors business definition is about staggering board member elections, it can help to prevent rapid changes in the company. A classified board of directors is one of the best defenses against a hostile takeover. A hostile takeover is where a company tries to take over another company against the wishes of the target company’s management. Since the directors in a classified board aren’t up for election at the same time, it would take longer for the hostile company to replace them.

The Benefits of a Classified Board of Directors

One of the classified board of directors advantages is that it’s a defense against a hostile takeover. A hostile company cannot quickly replace a board when the directors have varying term lengths expiring at different times. Plus, since a board of directors is responsible for hiring and firing senior managers, a hostile company can’t quickly replace senior management either.

Another one of the classified board of directors benefits is consistency in leadership. Staggering board members’ terms allow for overlapping terms; thus, the senior board members can help onboard new board members. 

Considerations for a Classified Board of Directors 

One of the classified board of directors disadvantages is that your company could be stuck with directors they don’t like. Having a classified board of directors means shareholders can’t change it as easily if they don’t like what they’re doing. Additionally, many believe that a classified board of directors can breed complacency. Because the board members serve for a fixed period, they don’t necessarily have to meet the demands of the shareholders. 

Other Names for a Classified Board of Directors

A classified board of directors definition is a board with staggered term lengths. This definition lends itself to the other name a classified board is known by: a staggered board of directors.

Classified Board of Directors Examples

Here’s an example of a classified board of directors. Let’s say your company has a board of directors of 12 with three classes of directors, divided into thirds. Class A members serve for one year, Class B members for three years, and Class C members for five years. Suppose a hostile company acquires a majority of shares from your company. In that case, they can’t immediately replace your board of directors because there’s already a fixed number of board members up for election each year.

Summary

A classified board of directors is a board with members who serve terms of varying, staggered lengths of time. A classified board of directors can help protect a company against a hostile takeover by another company.