Benefits of Lawyer-Directors on the Boards of Companies

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].

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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.

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Posted in Business, Corporate Governance Tagged with: , , ,
14 comments on “Benefits of Lawyer-Directors on the Boards of Companies
  1. anu says:

    Nice article. Very comprehensive and elaborate.

    • anu says:

      It is very necessary for a company to have lawyers on its board of directors because they’ll help out with legal problems and also give good advice to help in the running of the company as a whole; but I think other professionals should be allowed on the board of directors depending on the objects and aims of the company because they’ll have more knowledge in their field.

  2. Ihemadu Ngozi says:

    The importance of lawyers as part of the board of a company has been over emphasized because in my opinion, other professionals like doctors, engineers, etc should make up the board (depending on the object of the company) to handle more technical matters.

  3. oremii says:

    One of the benefits of having a lawyer on the board is that they know the legal implication of decisions to be made and the give legal advice when necessary.

    • ogo says:

      @Ngozi, I align myself with you because other professionals should equally make up the board and not only lawyers, so that they can handle other technalities. This article is equally interesting because lawyers as directors of the board help with the legal problems and help to make good decisions for the company and good advisers also.

  4. nebosky says:

    This is an interesting article. Lawyers are very important to be part of the board of companies but other professionals should be allowed to be part of the board of companies, depending on the aims and objectives of the companies concerned.

  5. divalicious says:

    It is really important for a lawyer to be part of the board of a company because in my opinion no matter the major object of a company, lawyers handle almost all technical issues.

  6. nikkieluvs says:

    I am of the opinion that it is not only lawyers that can make up board of companies, other professionals should as well be recognised because everybody is an expert in his or her own field. This article is equally interesting because the importance or usefulness of lawyers as directors of the board of companies cannot be overemphasized in the sense that, they help with legal problems and help to give legal advice, making good decisions for the company, also gives companies some legal implication that might befall it, if entering into an illegal contract.

  7. halimahslimfit says:

    It is important to have lawyers on the board of directors of a company because they play an important role in a company, especially in a company that makes profit. They help in guiding the company on what to do and what not to do. At the same time the other professions should be on boards too. In addition, there can be obvious advantage for a lawyer to sit on the board of a company, particularly if the company is a large, successful, and respected entity. It will also be of greater disadvantage for a lawyer to be among the board of director in a non-profitable company. The courts have for many years held that directors who are also lawyers are held to a higher standard in what they know or should know about the company as stated in the case of Blakely v. Lisac, 357 F. Supp. 255 (D. Ore. 1972)

  8. Aykonsult says:

    I agree that other professionals should also be included in the board of companies and so does the author of this article. The purpose of this article is simply to point out the purpose, importance and merits of lawyers on the boards of companies especially large ones. I must say that if this article was fully understood one would realize that the author was not over-emphasizing the role or importance of lawyer-directors and neither was he clamouring for the exclusion of other non-law professionals on the board, rather the intent of this article was to enlighten shareholders, directors, students and other stakeholders of the importance of ‘Lawyer-Directors’ on the boards of directors of companies.

  9. AKP says:

    It’s a very interesting article.

  10. Ifeanyi Christopher Mbanefo says:

    “A lawyer-director increases firm value by 9.5 percent, and when the lawyer is also a company executive, the increase in firm value rises to 10.2 percent,” according to the Cornell Law School research paper”. Hence, the value of Lawyer-Directors in Public corporations cannot be over or under emphasized.

    • iherue joyce O says:

      I agree that lawyers should be part of the board of companies together with other professionals. However, lawyers are very important, an their impact on the board is never over-emphasized.

  11. Comfort says:

    Having 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 valuable to the firm and its shareholders, and also curb excessive corporate risk taking.

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