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Friday, August 25, 2017

Lawyers Make Better CEOs Than MBAs

Harvard Business Review LogoHarvard Business Review:  Do Lawyers Make Better CEOs Than MBAs? (full article here), by M. Todd Henderson (Chicago):

We were interested in how lawyer CEOs might influence firm decision making more broadly — and whether they differ from CEOs without a law degree. I collaborated with Irena Hutton, Danling Jiang, and Matt Pierson to compare the behavior of CEOs with law degrees with those who earned a bachelor’s degree, MBA, or other degree. We looked at about 3,500 CEOs, about 9% of whom have law degrees. They were associated with nearly 2,400 publicly traded firms in the S&P 1500 from 1992 to 2012.

The most obvious impact a lawyer CEO might be expected to have is on the amount of litigation their company is involved in. We looked at over 70,000 lawsuits filed against our sample of firms in federal courts during those 10 years. We focused on nine common types of corporate litigation: antitrust, employment civil rights, contract, environmental, intellectual property, labor, personal injury, product liability, and securities.

The result was clear: Firms run by CEOs with legal expertise were associated with much less corporate litigation. Compared with the average company, lawyer-run firms experienced 16% to 74% less litigation, depending on the litigation type. Employment civil rights, antitrust, and securities lawsuits were reduced the most, while contract saw the smallest (but still significant) reduction with a lawyer CEO. The results were economically meaningful, since the reduction was several fewer suits per year in some cases. ...

Once we determined that lawyer CEOs were associated with less litigation, we needed to determine whether having a law degree caused the reduction. After all, there are two explanations for why firms run by lawyer CEOs experienced less litigation: Either (1) these CEOs made strategic choices that resulted in less litigation against their companies, or (2) companies with an already low propensity for litigation simply chose to hire lawyer CEOs. While these explanations need not be mutually exclusive, we found that less litigation was, at least in significant part, consistent with active risk management by the CEO. When it came to risk taking and other behaviors that could generate litigation, lawyer CEOs appeared to act differently from non-lawyer CEOs. ...

We found that lawyer CEOs were not only associated with less litigation but, conditional on experiencing litigation, were also associated with better management of litigation. So companies run by lawyers, if sued, spent less on litigation and did better — they settled less often when sued and lost less often when cases went to court. ...

Our research produces two conclusions. First, CEOs with legal expertise are effective at managing litigation risk by, in part, setting more risk-averse firm policies. Second, these actions enhance value only when firms operate in an environment with high litigation risk or high compliance requirements. Otherwise, these actions could actually hurt the firm.

Ideally, of course, a CEO would be the best of both worlds: able to reduce litigation through prudent decision making while also knowing when to take risks to enhance value for the firm.

http://taxprof.typepad.com/taxprof_blog/2017/08/lawyers-make-better-ceos-than-mbas.html

Legal Education, Scholarship | Permalink

Comments

Are we allowed to believe that neither lawyers nor MBAs are likely to make good CEOs? What matters is courage, honesty, integrity and competence—all sadly lacking in today's Clintonian world. No amount of paper on the wall can alter those deficiencies.

Posted by: Michael W. Perry | Aug 27, 2017 6:47:17 AM

What the article stated is having a CEO makes for less litigation than having an MBA CEO. It does not say that the company is run better or more profitable. You could have more litigation while still being more profitable.

Posted by: Kevin Stroup | Aug 27, 2017 8:24:10 AM