Whilst they were best in high risk companies, lawyers scored poorly as CEOs in less risky businesses such as printing and publishing. University of Chicago academic Professor Todd Henderson conducted research with other academics looking at companies which hired lawyers as CEOs and discovered that they beat CEOs with MBAs on a number of levels.They studied 3500 CEOs, nine per cent of whom have law degrees from nearly 2400 public companies.
Less corporate litigation
One of the early findings was that companies run by CEOs with legal expertise were associated with much less corporate litigation - ranging from 16 per cent to 74 per cent less, Professor Henderson said in an article in the Harvard Business Review. Companies run by lawyers behaved differently in several dimensions related to risk taking than those run by non-lawyers. CEOs with legal training tended to implement more-cautious earnings management policies, especially in industries with high litigation risk, like pharmaceuticals, and were more likely to be cautious on accounting principles such as accruals. They also deployed strategies associated with less litigation and lower volatility, the research found.
Settle less, win more
They were associated with better management of litigation, getting better results than non-lawyer CEOs. They settled less often when sued and lost less often when cases went to court. The research discovered CEOs with legal training were associated with higher firm value, but only in a subset of firms, specifically, in high-growth firms and firms with large amounts of litigation. Outside this, however, the effect of CEOs with legal training on firm value was negative, Professor Henderson said. 'This is perhaps because in low-litigation industries the benefits of less litigation are offset by lawyer CEOs’ overly cautious firm policies, which can negatively affect cash flows and growth,' he said.
Risk-averse policies
The research concluded that CEOs with legal expertise are effective at managing litigation risk by, in part, setting more risk-averse firm policies. Second, the actions were valuable only when firms operated in an environment with high litigation risk or high compliance requirements. 'Otherwise, these actions could actually hurt the firm,' he wrote. Source: Harvard Business Review
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