“The accepted wisdom, that a lawyer who is also a corporate director has a fool for a client, is outdated,” says Charles K. Whitehead, Professor of Law. In a new working paper, Whitehead and co-authors Lubomir P. Litov and Simone M. Sepe argue that the benefits of lawyer-directors in today’s world significantly outweigh the costs. "On average, a lawyer-director increases firm value by 9.5 percent, and when the lawyer is also a company executive, the increase rises to 10.2 percent,” says Whitehead. “During our sample period, 2000-2009, the result was an almost doubling in the percentage of public companies with lawyer-directors.”
Released this month, Lawyers and Fools: Lawyer-Directors in Public Corporations is the first paper to analyze the rise of lawyer-directors on corporate boards. Departing from the dominant model for evaluating board composition, which focuses on the internal costs of separating ownership and control, Whitehead et. al. examine the influence of the external business environment on optimal board composition, as well as the value of legal expertise in company management.
“Our findings fly in the face of requirements that emphasize the independence of directors,” says Whitehead. “Our intuition is that a lawyer-director brings a special perspective based on her training and experience with the law and legal issues and an appreciation of doing things ‘by the book’ that likely comes with it. Factors other than independence, such as training, skills, and experience, can be as or more valuable to the firm and its shareholders.”
Having a lawyer on the board, according to the authors’ research, curbs corporate risk-taking. That outcome appears to be as much the product of efforts by lawyer-directors to enhance internal governance as it is a response to litigation and regulation. By filling substantive gaps in how the company is managed, the authors argue, board composition can increase firm value based on the particular management skills and experience that directors bring to the job.
The full paper is publicly available online at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2218855.