Lawyers and Fools: Lawyer-Directors in Public Corporations
Lubomir P. Litov
University of Arizona - Department of Finance; University of Pennsylvania - Wharton Financial Institutions Center
Simone M. Sepe
University of Arizona - James E. Rogers College of Law
Charles K. Whitehead
Cornell Law School
April 21, 2013
Georgetown Law Journal, Vol. 102, Forthcoming
Cornell Legal Studies Research Paper No. 13-63
Arizona Legal Studies Discussion Paper 13-25
The accepted wisdom — that a lawyer who becomes a corporate director has a fool for a client — is outdated. The benefits of lawyer-directors in today’s world significantly outweigh the costs. Beyond monitoring, they help manage litigation and regulation, as well as structure compensation to align CEO and shareholder interests. The results have been an average 9.5 percent increase in firm value and an almost doubling in the percentage of public companies with lawyer-directors.
This Article is the first to analyze the rise of lawyer-directors. It makes a variety of other empirical contributions, each of which is statistically significant and large in magnitude. First, it explains why the number of lawyer-directors has increased. Among other reasons, businesses subject to greater litigation and regulation, and firms with significant intangible assets (such as patents) value a lawyer-director’s expertise. Second, this Article describes the impact of lawyer-directors on corporate monitoring. Among other results, it shows that lawyer-directors are more likely to favor a board structure and takeover defenses that reduce shareholder value — balanced, however, by the benefits of lawyer-directors, such as the valuable advice they can provide. Finally, this Article analyzes the significant reduction in risk-taking and the increase in firm value that results from having a lawyer on the board.
Our findings fly in the face of requirements that focus on director independence. Our results show that board composition — and the training, skills, and experience that directors bring to managing a business — can be as or more valuable to the firm and its shareholders.
Number of Pages in PDF File: 80
Keywords: corporate governance, board of directors, board composition, lawyer-directors
JEL Classification: D21, G34, K00, K20, K22, L21, L22, M10, M20, M21, M29Accepted Paper Series
Date posted: February 17, 2013 ; Last revised: May 9, 2013
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