By Liz Warren-Pederson
The percentage of publically-traded companies with lawyer-directors doubled over the period from 2000 to 2009. Now a new paper by Assistant Professor of Finance Lubomir Litov is the first to analyze the value of these legally-trained directors on public boards. The paper, coauthored with Simone Sepe of the UA Rogers College of Law and Charles Whitehead of Cornell University Law School, is forthcoming in the Georgetown Law Journal.
“Because the U.S. is moving from an economy of goods to an economy of services, there’s a greater need for legally-trained practitioners to participate in decision-making,” said Litov.
Litigation, for example, is an asset for companies with large intellectual property portfolios. Litov pointed to recent legal battles between Apple and Samsung. “A legally-trained executive can be helpful in managing successful patent litigation, which adds value to the firm,” he said.
The authors also indicate that the changing regulatory environment can be another argument for the inclusion of legally-trained directors on boards. Litov said the idea for the paper came from watching an interview with Home Depot co-founder Bernie Marcus. “He said that if there was as much regulation in the 1970s as there is now, that the firm would be unlikely to have grown as much as it has,” Litov said. “Regulation has become very important in his view. He said that he and his co-founders would make decisions among themselves without any concerns. Now, they need teams of lawyers, because there are so many stakeholders.”
Lawyer-directors also seem to have an impact on corporate monitoring and CEO compensation. According to Litov’s findings, they are more likely to favor a board structure and takeover defenses that reduce shareholder value.
“Our findings fly in the face of requirements that focus on director independence,” said Litov. “We show that board composition — and the training, skills, and experience that directors bring to managing a business — can add more value to the firm and its shareholders.”
He, Sepe, and Martijn Kremers of Notre Dame are also collaborating on additional work in corporate governance. One paper in progress examines the long-standing debate in finance and law between shareholder and internal stakeholder imminence. “The paper looks at the practice of staggering boards of directors,” Litov said. “This is a common but controversial practice in the U.S. We argue that this mechanism is helpful in promoting innovation and protecting long-term projects, because it allows internal stakeholders to fully commit to the company.”
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