gavel_money

It’s something you might have intuitively suspected, but for the first time, here’s empirical proof.

The project is truly impressive in scope. The authors, who hail from the University of Chicago, Florida State University and SUNY at Stony Brook, looked at the educational background of 3,500 CEOs paired to 2,400 of the biggest public companies, then dug into the results of 70,000 lawsuits over a 20-year period.

“We find that firms run by CEOs with legal expertise are indeed associated with less corporate litigation. In our baseline analysis of nine types of common corporate litigation, these firms exhibit lower frequency of antitrust, employment civil rights, contract, labor, securities and personal injury litigation,” wrote Todd Henderson, Irena Hutton, Danling Jiang and Matthew Pierson. Moreover, lawyer-CEOs are “also associated with a lower proportion of lost and settled litigation.”

Impressive, right?

Still, only 9.1 percent of companies in the sample of Standard & Poor’s 1,500 firms are currently run by a CEO with a law degree, according to the study.

To be sure, there are some big names on the list, like Goldman Sach’s Lloyd Blankfein (Harvard Law School), MetLife’s Steve Kandarian (Georgetown University Law Center) and American Express’s Kenneth Chenault (Harvard Law School).

But overall, you might expect more lawyer-CEOs, given their track record of containing legal costs

It turns out, lawyers make really good chief executives “only in settings where litigation is a significant concern or legal guidance is important,” the study found, like at pharmaceutical companies. Then, having a lawyer at the helm is associated with higher corporate value.

“While this result should be interpreted as causal with caution, it is consistent with our prior finding that the value of lawyer CEOs comes from active litigation management,” the authors found.

They offer a case study: Merck and Pfizer, which both faced similar liability for cardiovascular side-effects related to their rheumatoid arthritis drugs. Merck, which was not headed by a lawyer, paid $4.85 billion to settle product liability claims in 2007. Pfizer, then led by Jeff Kindler, who was previously the company’s general counsel, paid just $890 million in 2008

Merck also shelled out $830 million for a securities class action, compared to two Pfizer settlements totaling $650 million. There were other penalties as well, putting Merck’s total legal tab at $6.63 billion versus $3.84 billion for Pfizer.

Coincidence? The results of the study suggest it’s not.

But before we clamor for lawyers to run everything, there’s a big catch.

In industries where getting sued is more uncommon and less costly, lawyer-CEOs are actually associated with diminished corporate value.

Innate cautiousness may be to blame.

The authors posit that lawyers “pursue risk management through more conservative firm policies at the expense of future growth and cash flows.” That includes lower investment in intangible and tangible assets as well as less risky investment policies.

The study quotes former Home Depot CEO Frank Blake (J.D. Columbia Law School), who put it another way. “Law school consists of taking normal people and getting them to worry about what no sane person would worry about.”

The authors got their data from the National Archive of Criminal Justice Data via the InterUniversity Consortium for Political and Social Research. The database includes 5 million federal court cases from 1992 to 2012. They weren’t able to include cases filed in state court, but figured that the federal filings were a good proxy for total corporate litigation.

Check out some of their findings:

“In our initial sample of 153,344 lawsuits for 3,410 publicly traded firms over 20 years (prior to its merge with CEO education data), approximately 32% of lawsuits are settled and nearly 2% are lost. The penalty attached to an average lost lawsuit, including lawsuits with zero or unreported penalties, is $0.835 million and approximately $2 million if we exclude observations with no recorded or zero values. The average reported settlement amount is $1.7 million, although the data availability is sparse.”

“In addition to the penalties and legal costs, firms lose market value around the announcement of malfeasance or litigation filing. The three-day abnormal market value loss around the filing date is -0.13%, which amounts to $8.3 million for an average company in our sample.”

Lawyer-CEOs didn’t reduce frequency or costs associated with all litigation—they had no effect one way or the other on environmental and IP lawsuits.

Product liability, which tends to occur in bursts, is more complicated. Lawyer-CEOs are actually associated with more product liability litigation. “This finding may be due to reverse causality if a lawyer CEO is hired to deal with such catastrophic litigation,” the authors theorized.

Baker Botts special counsel Cynthia Cole, who was co-interim CEO of Spectra7 Microsystems Inc., said lawyer-CEOs also do a better job working with other lawyers to manage legal issues—including those that go beyond monetary penalties.

“Not every CEO, though talented, has a healthy respect for the role of the general counsel and outside counsel in setting internal policies that lower risk and facilitate compliance,” she said after reviewing the study. Its findings “show that a lawyer-CEO, though possibly more conservative, brings value to shareholders by also better managing reputation damage, whose costs can be unlimited in a competitive environment.”


We’re glad you enjoyed this excerpt from Litigation Daily, the exclusive source for breaking news, analysis and commentary about the world’s largest business disputes. Click here to subscribe. 

Contact Jenna Greene at jgreene@alm.com. On Twitter: @jgreenejenna