Whitehead

The benefits of lawyer-directors of public corporations significantly outweigh the costs, according to a new working paper by Charles K. Whitehead, professor of law and two co-authors.

“The accepted wisdom, that a lawyer who is also a corporate director has a fool for a client, is outdated,” says Whitehead. “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. During our sample period, 2000-09, the result was an almost doubling in the percentage of public companies with lawyer-directors.”

Released online this month on the Social Science Research Network, “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 and his colleagues examined the influence of the external business environment on optimal board composition and 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 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 co-authors are Lubomir P. Litov and Simone M. Sepe, both of the University of Arizona.

The paper is online: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2218855.

Owen Lubozynski is a freelance writer for the Law School.