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More US lawyers 'moving into boardroom'

Posted by: Laurence Simons 25/02/13

There are an increasing number of jobs for lawyers in US boardrooms, according to a report from Cornell Law School and Arizona University, which found that legal directors are becoming a common sight in America and taking on more responsibility when it comes to determining how a firm manages its corporate governance issues.

Not only are people from legal backgrounds being given a chance to sit in the big chair and wear the fanciest hat, they are making a tangible difference to how businesses perform, reports the Financial Times.

Only 24 per cent of US companies had lawyer directors in 2000, while 43 per cent did so in 2009, indicating how pronounced the trend has become in the last decade.

Companies with lawyer directors tended to pay their chief executives more, but have less volatility in pay, due to lower levels of corporate risk-taking and default.

Furthermore, litigation risks drop for firms that take on a lawyer as a top executive, while when there were no lawyers on the board, there was a 308 per cent increase in the effect of accounting malpractice litigation on firm value.

This changing situation could encourage people to reconsider their preconceptions about how a business should be run, the report's authors suggested.

"The board's primary function as an agency-cost-reducer may have been appropriate in the past, but companies have grown too complex for value-maximising boards to simply act as monitor," they argued.

In the current business climate it is important that executives take on a more direct management role - something that lawyers can be well-suited for, especially if it involves litigatory problems.

Fundamentally, the report suggests that the boring, stick-in-the-mud nature of corporate law experts - while it might not make them the life and soul of the party or the person you want to invite to your weekly cocktails-and-different-types-of-pork evening - means they are the ideal people to act as brakes on the worst excesses of business.

However, it is possible that a company which chooses to tap lawyers as board members could be better run than their peers in the first place - the study does not completely disentangle the issue of correlation versus causation.

Nevertheless, this adds to a host of recent reports that have suggested in-house lawyers are playing a critical role in helping firms move forward, and taking on a great deal of responsibility when it comes to corporate culture and governance.