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Abstract. In the last decade, the balance of power between shareholders and boards has shifted dramatically. Changes in both the marketplace and the legal landscape governing it have turned the call for empowered shareholders into a new reality. Correspondingly, the authority that boards of directors have historically held in U.S. corporate law has been eroded. Empirical studies associating staggered boards with lower firm value have been interpreted to favor this shiftof authority, supporting the view that protecting boards from shareholder pressure is detrimental to shareholder interests.
This Article presents new empirical evidence on staggered boards that not only exposes the limitations of prior empirical studies, but also, and more importantly, suggests the opposite conclusion. Employing a unique and comprehensive dataset covering thirty-four years of board staggering and destaggering decisions-from 1978 to 2011-we show that staggered boards are associated with a statistically and economically significant increase in firm value. In light of these novel empirical results, we then show theoretically that a corporate model with staggered boards emerges as a rational institutional response to market imperfections that are more complex and more significant than shareholder advocates have realized. Boards that retain their historical authority-empowered boards-benefit, rather than hurt, shareholders. This Article concludes with a normative proposal to revitalize the authority of U.S. boards.
Introduction
At the turn of the nineteenth century, America invented the most successful business model of all time: corporate capitalism.1 At the center of that economic success was the "management corporation."2 As the name suggests, management corporations revolved around managers-salaried, professional executives-brought in to "hire capital from the investor."3 Underlying this arrangement was a "tacit societal consensus" that corporate growth took priority over corporate profits,4 as long as managers could compensate their shareholders with stable dividends-a goal they successfully accomplished.5 Corporate law accommodated the development of this business model, privileging a board-centric system under which firm insiders- directors and managers-retained virtually exclusive authority over the corporation. Unlike in capitalistic models elsewhere, such as in the United Kingdom, American shareholders have historically been relegated to the role of spectators, with only a limited capacity to intervene in corporate affairs.6
However, starting in the late 1970s through the early 1980s, and with increasing intensity in the 2000s, a competing corporate model has gained popularity.7...