Lawyers and Fools: Lawyer-Directors in Public Corporations

68 Pages Posted: 17 Feb 2013 Last revised: 20 Jan 2014

Lubomir P. Litov

University of Oklahoma - Michael F. Price College of Business; University of Pennsylvania - Wharton Financial Institutions Center

Simone M. Sepe

University of Arizona - James E. Rogers College of Law; IAST - Fondation Jean-Jacques Laffont - TSE ; University of Toulouse 1 - Industrial Economic Institute (IDEI)

Charles K. Whitehead

Cornell Law School

Date Written: January 14, 2014

Abstract

The accepted wisdom — that a lawyer who becomes a corporate director has a fool for a client — is outdated.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.

Keywords: corporate governance, board of directors, board composition, lawyer-directors

JEL Classification: D21, G34, K00, K20, K22, L21, L22, M10, M20, M21, M29

Suggested Citation

Litov, Lubomir P. and Sepe, Simone M. and Whitehead, Charles K., Lawyers and Fools: Lawyer-Directors in Public Corporations (January 14, 2014). Georgetown Law Journal, Vol. 102; Cornell Legal Studies Research Paper No. 13-63; Arizona Legal Studies Discussion Paper 13-25. Available at SSRN: https://ssrn.com/abstract=2218855 or http://dx.doi.org/10.2139/ssrn.2218855

Lubomir P. Litov

University of Oklahoma - Michael F. Price College of Business ( email )

307 West Brooks
Norman, OK 73019-4004
United States

University of Pennsylvania - Wharton Financial Institutions Center

2306 Steinberg Hall-Dietrich Hall
3620 Locust Walk
Philadelphia, PA 19104
United States

Simone M. Sepe

University of Arizona - James E. Rogers College of Law ( email )

P.O. Box 210176
Tucson, AZ 85721-0176
United States

IAST - Fondation Jean-Jacques Laffont - TSE ( email )

21 allée de Brienne
31015 Toulouse Cedex 6
Toulouse Cedex, F-31042
France

University of Toulouse 1 - Industrial Economic Institute (IDEI) ( email )

Manufacture des Tabacs
21 Allee de Brienne bat. F
Toulouse Cedex, F-31000
France

Charles K. Whitehead (Contact Author)

Cornell Law School ( email )

Myron Taylor Hall
Ithaca, NY 14853
United States

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