Historically, if people were to ask a CEO and his or her board to describe their ideal director, lawyer might not have made the top ten list. But there has been a radical shift during the past decade. The old thinking was that lawyers were not necessarily welcome as directors on boards. The new thinking is they are not only welcome, but much sought after. Why the change?
The profile of the lawyer-director has changed – to someone who combines valuable knowledge of the business strategy with legal and analytical skills – as has the increasingly regulatory-oriented environment in which companies operate, making lawyers’ training and experience valuable assets to the board.
“In the past,” says T. K. Kerstetter, Chairman at NYSE Governance Services - Corporate Board Member, “it was kind of an open secret that companies didn’t want lawyers in the boardroom because they felt too much stuff would be picked apart.” Observing the very different attitude today, he says many lawyers are integral to the business: “There are some GCs who work for global companies and have 900 attorneys under them. They’ve dealt with every global challenge the company has. Today’s GCs can’t be looked upon as just GCs – they’re the risk officer or the compliance officer and they’re managing huge divisions; they’re sitting in on all of the board meetings. Who is better qualified to serve on a board than someone like that?”
According to a February 2013 Cornell Law School study of S&P 1500 boards over the past decade (By Lubomir P. Litov, Simone M. Sepe, and Charles K. Whitehead), the rise of director/lawyers is a positive trend. Beyond monitoring, the authors say, lawyers on boards help manage litigation and regulation, as well as structure compensation to align CEO and shareholder interests. And boards are clearly recognizing and reaping the benefits of adding lawyers to their mix of directors that comprise the board team. The study found that the number of lawyers on boards had doubled in that time, with lawyers now on 43% of these boards and, interestingly, that the value of these companies was about 9.5% higher than those companies without lawyers on their board.
The bottom line, says Kerstetter, is that “if boards are looking past lawyers as a candidate pool, they are making a big mistake.”
“From my point of view,” says John Haley, CEO of Towers Watson, “lawyers make particularly good board members. The training they get in law enables them to put business issues in context, to ask questions about an initiative or a strategy, and make sure everything is well thought out.”
In fact, knowing how to ask the right questions before acting, not just having the answers, is widely viewed as a crucial skill to have on the board. “Having a lawyer on the board helps to make sure a company walks an ethical line and that your company is asking the necessary questions around risk,” observes Catherine Allen, Chairman and CEO of the The Santa Fe Group. Their detail orientation is greatly appreciated, too. “Our lawyers on the board are the ones that nitpick on the minutes, as they should, to make sure the wording is correct. It gives you the security of knowing that if you ever went through discovery, your minutes would not get you into trouble.”
Linda Rabbitt, a director on the Towers Watson board, believes lawyers play a vital role in risk analysis, an ever-expanding area of board responsibility: “Lawyers tend to be very adept at the concepts of risk mitigation and, by virtue of their training, are skilled at uncovering the facts and the truth. They ask very good questions and they’re not afraid to ask those questions.”
It’s not lawyers per se who are sought for boards, however, but specifically that desirable hybrid of lawyer-businessperson. “When you find lawyers who are also business problem solvers, that’s an extraordinarily powerful combination,” says Haley. “You have someone with a knowledge of the law generally and someone who has been taught a way of thinking, which is to understand context and make sure there is an alignment of key interests.”
“Lawyers who make the most significant contributions are those who can both identify risk and help the board to determine what is an acceptable risk level within legal parameters while focusing on the business decision, ” observes Patricia Moss, former President and CEO of Cascade Bancorp and currently Vice Chairman of the company’s board.
Diversity on the board team
In a newly expanded definition of diversity – which includes not only traditional gender and ethnic categories but more generally diversity of thought – lawyers are a valuable addition to boards where they may not have served in the past.
Haley underscores the importance of viewing the board as a team when assembling the “players.” “When you’re putting together a team, you don’t want all shortstops or centerfielders,” he says. “You want people who play different positions – specialists – as part of the overall team and skills required. In that context, having one or two lawyers on the board is fantastic, particularly if you pair them with the right kind of other capabilities generally required in a director and the rest of the directors.”
Certainly no board member can possess every skill, nor do you want them to. “No one board member can cover the entire landscape of what a board needs to do,” observes Rabbit. “You need some directors who are experts in risk, you need others who are experts on the strategy, and still others who are focused on the operations of the company and financial discipline. When you put all those individuals together into a team you have a good, sound board with all the needed fundamentals and governance excellence.”
As Rabbit suggests, it’s important to maintain an effective ratio of skills and abilities. “You don’t want too many lawyers on the board, but a good mix of what a particular board requires,” says Allen. “While lawyers can provide great value, they are sometimes not as strategic or growth-oriented as other directors. The key is to pay attention to where your revenue streams are coming from and be positioned to be nimble and quick. So having a board with at least 60% of directors who are operational or marketing-oriented, with the rest risk-oriented, is a nice combination.”
It’s all about finding the right balance across the team as a whole. “The best lawyers as contributors on boards are those that bring a good balance of business judgment and legal perspective. Some lawyers who are very strong on risk but haven’t done many business transactions may not provide as much business value. That could potentially become a negative if there were too tight a rein on risk-taking and the band of risk became too small. But that’s where it goes back to the entire team and other board members have a chance to weigh in and say, ‘let’s make sure to have a balance here,’” says Moss.
Both the statistical and anecdotal evidence point to one conclusion: Lawyers are increasingly being sought as directors and are valuable additions as directors when they incorporate both legal and business perspectives, know how to properly assess and balance risk, and are part of a strategically selected overall board where the skills of individual “players” enhance the effectiveness of the entire team.
If your company is looking to hire General Counsel with a strong business background or looking for a board member who can add value with legal expertise, a legal recruiting firm can help you find the right fit.
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Bob Barker is the managing partner of BarkerGilmore LLC, a leading legal recruiting firm that specializes in hiring in house counsel and hiring compliance officers.