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Lawyers and Fools: Lawyer-Directors in Public Corporations

Author

Listed:
  • Litov, Lubomir P.

    (University of AZ and University of PA)

  • Sepe, Simone M.

    (University of AZ and Toulouse School of Economics)

  • Whitehead, Charles K.

    (Cornell University)

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The accepted wisdom-that a lawyer who becomes a corporate director has a fool for a client-is outdated.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

Suggested Citation

  • Litov, Lubomir P. & Sepe, Simone M. & Whitehead, Charles K., 2013. "Lawyers and Fools: Lawyer-Directors in Public Corporations," Working Papers 13-15, University of Pennsylvania, Wharton School, Weiss Center.
    • Handle: RePEc:ecl:upafin:13-15
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    Cited by:

    1. Emmadonata Carbone & Sara Saggese & Fabrizia Sarto, 2023. "La relazione tra l?esperienza degli amministratori e il business plan: un?indagine empirica sulle imprese quotate in Italia," MANAGEMENT CONTROL, FrancoAngeli Editore, vol. 2023(1), pages 69-94.
    2. Bill Francis & Iftekhar Hasan & Qiang Wu, 2015. "Professors in the Boardroom and Their Impact on Corporate Governance and Firm Performance," Financial Management, Financial Management Association International, vol. 44(3), pages 547-581, September.
    3. Dhruv Chand Aggarwal, 2023. "The market for general counsel," Journal of Empirical Legal Studies, John Wiley & Sons, vol. 20(4), pages 895-940, December.
    4. Cai, Chen & Hasan, Iftekhar & Shen, Yinjie & Wang, Shuai, 2021. "Military directors, governance and firm behavior," Advances in accounting, Elsevier, vol. 55(C).
    5. Dongmin Kong & Junyi Xiang & Jian Zhang & Yiyang Lu, 2019. "Politically connected independent directors and corporate fraud in China," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 58(5), pages 1347-1383, March.
    6. Nguyen, Thanh Thi Phuong & Thai, Hanh Minh, 2022. "Effects of female directors on gender diversity at lower organization levels and CSR performance: Evidence in Japan," Global Finance Journal, Elsevier, vol. 53(C).

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