Recent studies have purported to show that the wave of board destaggering that has occurred over the past fifteen years has resulted in value destruction amounting to roughly $350 billion or 6.5% of value among S&P 1500 firms alone (here, here, and here). Management advocates, who have railed against staggered boards for decades, have enthusiastically touted these studies, referring to them as employing ‘sharpened statistics’. But are these results valid, or even plausible? In our recent study, Emiliano Catan, of NYU Law School, and I have concluded that the answer is no.
In order to destagger a board, both shareholders and boards must agree to a charter amendment. The implication of these studies, therefore, is that shareholders and boards joined together to visit substantial destruction on firms that they own and manage—and that they did so repeatedly over a fifteen-year period, presumably without observing the harm they were imposing on themselves. Before reaching this conclusion, another look at the data is warranted.
Upon taking another look, Catan and I found the following. The statistical association between the destaggering of boards and declining firm value (as measured by Tobin’s Q) is attributable to the fact that (a) large firms destaggered their boards earlier in the 2000s than did other firms and they did so in disproportionate numbers, and (b) a premium in value that large firms enjoyed during the last half of the 1990s dissipated over the period 2000 to 2010, with the most rapid dissipation early in that period. That is, large firms declassified their boards at a time in which the market was coincidentally erasing a value premium that they had enjoyed relative to smaller firms prior to 2000.
Having observed this coincidence, we looked at the impact of board declassification while controlling for the timing of declassification and for firm size. With this correction, the correlation between destaggering and firm value vanishes.
We also took a closer look at the supposed effect of board destaggering on firms with high R&D spending. The recent studies referred to above found that destaggering had a particularly negative impact on these firms. This is consistent with management advocates’ argument that board destaggering impairs long-term planning, which is particularly important in high-R&D firms.
Catan and I looked more closely at those data and reached results similar to the results described above with respect to firm size. It turns out that during the period from 2000 to 2015, firms with high R&D spending experienced fluctuations in value relative to firms with low R&D spending—fluctuations that were unrelated to board destaggering. Parallel to the approach with took with respect to firm size, we separate high R&D firms from lower R&D firms and within each group compare firms that destaggered with those that did not. Once again, with this adjustment the association between board destaggering and firm value for high-R&D firms vanishes.
In short, the findings of the recent studies are spurious. We find no association between board destaggering and firm value.
Michael Klausner is the Nancy and Charles Munger Professor of Business and a Professor of Law at the Stanford Law School.