Undoubtedly, board composition is a crucial element of firm value. This understanding underscores the importance of recent studies regarding board composition and the performance of companies. Recently, we drew attention to research findings on the impact of academics in boardrooms [see here].
In this article, we draw attention to recent research findings on the benefits derivable by companies when they have lawyer-directors on their boards. The article is available here.
The research is predicated on the analysis of data on lawyer-directors on the boards of public companies in the United States from 2000 to 2009. It is the finding of the scholars that there are numerous benefits lawyer-directors bring to the boards on which they serve and these positively impact on the performance of the companies.
Some of the identified positive impact of lawyer-directors on boards includes the following: a lawyer-director causes a change in CEO incentives that more closely align CEO and shareholder interests; a lawyer-director is more likely to favour the adoption of takeover defences (such as classified boards and poison pills). Also, the researchers find a significant drop in the likelihood of stock option backdating when a lawyer is on the board. Finally, the presence of lawyer-director on boards leads to a decline in risk-taking and increase in firm value.
Interestingly, the researchers find that a board is more likely to include a lawyer-director under the following circumstances: (i) as the firm becomes subject to more litigation, including patent litigation; (ii) with an increase in firm size; (iii) if the firm is listed on the New York Stock Exchange (“NYSE”); and (iv) as the firm becomes more complex. A firm is also more likely to add a lawyer to its board if other firms in the same industry have lawyer-directors or when one or more current directors serves on a different board that has a lawyer-director.
In addition, it is the contention of the researchers “that board composition – and the training, substantive skills, and experience that directors bring to managing a business – can be as or more valuable to the firm and its shareholders than current requirements that focus on director independence.” They further added, “[w]e believe that rises in regulation and litigation have shifted that cost-benefit balance by contributing significantly to the benefits of having a lawyer on the board. The board’s perceived sense of risk, even if it overstates actual legal exposure, can also favor having a lawyer as a colleague. We also believe that lawyer-directors provide significant monitoring benefits, adjusting a CEO’s incentives to more closely align her interests with those of the firm. Importantly, the benefit of a lawyer-director is significant even after controlling for the effects of outside directors. In other words, for the variables that we consider below, the value provided by a lawyer-director is greater than the value provided by a non-lawyer, outside director. As a result, the percentage of firms with lawyers on the board has risen substantially – from 24.5 percent in 2000 to 43.9 percent in 2009 (and topping at 47.5 percent in 2005)”.
The full article can be freely downloaded here.