Banking on the Lawyers

61 Pages Posted: 26 Feb 2020 Last revised: 2 Mar 2020

See all articles by Scott Guernsey

Scott Guernsey

University of Tennessee

Saura Masconale

The University of Arizona Department of Political Economy and Moral Science; Center for the Philosophy of Freedom

Simone M. Sepe

University of Toronto - Faculty of Law; University of Toronto - Rotman School of Management; University of Arizona - James E. Rogers College of Law; European Corporate Governance Institute (ECGI); American College of Governance Counsel

Charles K. Whitehead

Cornell Law School

Date Written: February 13, 2020

Abstract

This Article is the first to analyze an unexplored but critical change in how modern banks are governed: the rise of lawyers as bank directors. That rise has been precipitous, raising the question of why lawyer-directors now sit on most bank boards.

Using novel empirical evidence, we show that lawyer-directors at banks are associated with efficient changes in risk management and significant increases in bank value. In particular, banks with lawyer-directors assume more risk in ordinary (non-crisis) circumstances and less risk when a crisis arises, in each case in a way that makes banks more valuable. Lawyer-directors do this by drawing on advocacy skills to critically analyze opposing points of view, an essential quality in managing the risks banks face today. They are also more likely to make complex information, sourced from multiple experts, more accessible to a bank’s board as part of its decision-making process. Finally, lawyer-directors are skilled at assessing litigation and regulatory risks, which have grown significantly in recent years.

Risk management failures were a primary cause of the 2008 financial crisis, prompting two principal regulatory responses: stricter capital requirements and enhanced governance. Their effectiveness remains hotly debated. Our findings have two important implications. First, we challenge the notion that stricter regulation is sufficient for efficient risk management. Rather, to manage a bank, directors must have the skills to think critically about risk. Second, we underscore the value of director expertise, showing that more is needed than simply the director’s independence now mandated by law.

Keywords: bank governance, risk management, lawyer-directors, financial crisis, corporate governance

JEL Classification: K2, K22, K23, G01, G18, G21, G22, G23, G24, G28, G32

Suggested Citation

Guernsey, Scott and Masconale, Saura and Sepe, Simone M. and Whitehead, Charles K., Banking on the Lawyers (February 13, 2020). Cornell Legal Studies Research Paper No. 20-13, Available at SSRN: https://ssrn.com/abstract=3537883 or http://dx.doi.org/10.2139/ssrn.3537883

Scott Guernsey

University of Tennessee ( email )

Haslam College of Business
Knoxville, TN 37996
United States

Saura Masconale

The University of Arizona Department of Political Economy and Moral Science; Center for the Philosophy of Freedom ( email )

315 Social Science Building
Tucson, AZ 85721
United States

Simone M. Sepe

University of Toronto - Faculty of Law ( email )

78 and 84 Queen's Park
Toronto, Ontario M5S 2C5
Canada

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

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

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

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

American College of Governance Counsel ( email )

555 8th Avenue, Suite 1902
New York, NY 10018
United States

Charles K. Whitehead (Contact Author)

Cornell Law School ( email )

Myron Taylor Hall
Ithaca, NY 14853
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
291
Abstract Views
2,468
Rank
223,189
PlumX Metrics