By Reynolds Holding
NEW YORK, Feb 26 (Reuters Breakingviews) - U.S. companies
could do with more lawyers. Not so much the bill-by-the-hour
variety, though they help cover bosses' behinds. Rather, hiring
attorneys as directors may cut risk, promote stability and boost
value. Based on new research, investors should be glad that
lawyers are turning up more often in U.S. boardrooms.
Attorneys haven't always embraced becoming directors. The
American Bar Association warned in 1998 that advising a board
while serving on it could create conflicts of interest. So it's
no surprise that only about a quarter of large U.S. public firms
had lawyers as directors in 2000.
But priorities shifted. Companies started seeking directors
who could navigate increasingly complex litigation and
regulation and hold executives accountable. By 2009, attorneys
sat on almost half of public company boards.
It seems to have helped financially. By one measure,
companies with lawyer-directors are almost 10 percent more
valuable than other firms, according to a Cornell Law School and
University of Arizona study. The study excluded financial firms,
because high leverage and regulatory scrutiny can skew their
The key could be lawyers' skill at cutting risk. Under their
watch, chief executives get paid more for steady growth than
taking chances, the research suggests. Meanwhile, litigation is
less costly and patent protections are tighter. It all brings a
lower cost of capital and higher value, the study concludes. On
the downside, lawyer-directors tend to favor stiffer takeover
defenses, but shareholders still come out ahead - at least on
In the real world, there are exceptions. Lawyer Joel Hyatt,
for instance, stumbled guiding fellow Hewlett-Packard
board members through the 2010 resignation of Chief Executive
Mark Hurd, whom he supported, and the hiring of Hurd's
short-lived successor Leo Apotheker, whom Hyatt helped select.
Chuck Prince, a long-time company lawyer, quit as Citigroup's
CEO in late 2007 as the bank bumbled toward the 2008
Even so, most boards that rubber-stamped risky behavior in
recent years could have used the kind of reality check in which
good attorneys specialize. With a knack for asking tough
questions, legally trained directors can be investors' friends.
- Lawyers who serve as directors increase the value of
public companies by an average of 9.5 percent and by 10.2
percent on average when also serving as company executives, new
research shows. Value was calculated according to Tobin's Q,
essentially a firm's market value divided by the replacement
cost of its assets.
- The study of U.S. public companies by professors Charles
Whitehead of Cornell Law School and Lubomir Litov and Simone
Sepe of the University of Arizona found that lawyer-directors
reduce financial risk and boost a company's value by managing
litigation, reining in executive pay and protecting patents and
other intellectual property.
- The authors excluded financial firms from the research,
concluding that the high leverage and regulatory scrutiny
typical of the industry might obscure the connection between
board behavior and financial performance.
(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)
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