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Lawyers on boards improve corporate value
More than 40 per cent of US companies had lawyers on their board of directors in 2009, almost doubling the figure from 2000 while slashing litigation risks and adding value to the company, a study this week found.
Boardroom: lawyers take their seats
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The Financial Times newspaper reports that a group of American law and finance professors conducted a comprehensive analysis of how American companies performed between 2000 and 2009, taking into account whether or not they had a lawyer on their board.
Risk-taking
The presence of a lawyer altered performance dramatically. Companies with a lawyer on the board paid chief executives more, but had less volatility in pay due to lower levels of corporate risk-taking and default.
Litigation risk also tumbled. Stock option backdating litigation, for example, was 94 per cent lower at companies with legal directors.
The study also found that companies which did not have a lawyer in the boardroom registered a 308 per cent increase in the effect of accounting malpractice litigation on firm value.
Market value
The study concluded that corporate value - measured by Tobin’s Q, the ratio of market value to replacement value of assets – is usually around 9.5 per cent higher when a lawyer is on the board.
However, the risks involved to lawyers themselves may make them think twice about taking a seat at the top table, as the research found lawyers face ‘greater-than-average risks’ of being sued than non-lawyers.
The study was led by Lubomir Litov (University of Arizona - Department of Finance), Simone Sepe (University of Arizona - James Rogers College of Law) and Charles Whitehead (Cornell Law School).
