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Lawyer directors increase company value by 10 per cent

Research finds reduced risk taking and improved internal governance 

22 February 2013

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By Manju Manglani, Editor (@ManjuManglani)

Lawyers who are corporate directors can increase their organisation’s value by 9.5 per cent, according to recently-published research on the value of legal expertise in company management.

It found that, when lawyers are also company executives, the increase in value rises to 10.2 per cent.

The study by Charles K. Whitehead, Lubomir P. Litov and Simone M. Sepe of Cornell University Law School explored the rise of lawyer directors on US corporate boards.

During the sample period of 2000 to 2009, the authors found that there was an almost doubling in the percentage of public companies with lawyer directors.

A key factor in this growth was businesses being subject to greater litigation and regulation, and companies with significant intangible assets (such as patents) requiring a lawyer director’s expertise.

The authors found that having a lawyer on the board curbs corporate risk taking. They noted that this outcome appears to be as much the product of efforts by lawyer directors to enhance internal governance as it is a response to litigation and regulation.

“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 as or more valuable to the firm and its shareholders,” said Whitehead.

However, the authors also noted that they do not think the increase in firm value by lawyer directors and lawyer executives could be replicated by lawyers who advise the board, rather than join it.

“A lawyer-director is more likely than outside counsel to attend board meetings and have access to information needed to properly advise the board. She may also become aware of new information at an earlier stage, enabling her to flag concerns as they arise.

“In particular, she can assist her colleagues to better understand legal and regulatory problems and, as necessary, act as a bridge between the board and outside advisors to resolve them,” they say in their working paper.

“Directors and managers are also more inclined to follow the advice of a colleague who shares equal responsibility for its outcome. That may be particularly true of lawyer-directors in light of the higher standards to which the courts have held them.”

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