Making the Case for Lawyer CEOs

It’s one of those perennial parlour-game questions: What type of educational background makes for the best CEOs? Plenty will swear by the value of a finance or engineering pedigree, while others will insist you can’t go wrong with a battle-tested marketing executive. There is no right answer, of course. An engineering background may be great for a CEO of a technology firm but ill-fitting for a CEO of a fashion retailer. 

Curiously, you won’t find many people arguing in favour of a legal education. Judging by evidence in the executive suite, board recruiters agree. According to recent studies, fewer than 10 per cent of CEOs of public firms in the U.S. graduated from a law school. 

This is curious considering the evidence that lawyer CEOs are effective captains of the ship. A good example is Calin Rovinescu, Air Canada’s CEO from 2009 to his retirement in February 2021. Rovinescu was a former managing partner of law firm Stikeman Elliott who took the helm at limping Air Canada after the global recession and turned the company around.  

A recent study adds to the evidence by examining the impact that a lawyer CEO may have on the management of a potentially significant business risk—the disclosure of litigation loss contingencies. Public companies have to include in their financial statements reference to pending or potential lawsuits that could have a material hit on the bottom line. “First disclosure” is the initial bare-bones announcement of potential litigation. “Pre-warning” is a firm’s explicit warning of a significant legal setback and an estimate of the material loss. In contrast to first disclosure, a pre-warning could include valuable information that opposing counsel could use to drive up settlement demands. 

The study’s authors argue that because litigation involves a high level of ambiguity and uncertainty, a CEO’s legal expertise is likely to play a significant role in managing litigation loss contingency disclosures.  

What did the study find?

• Lawyer CEOs tend to make first disclosures about a pending litigation case on a timelier basis than non-lawyer CEOs. 

• Faster disclosure is particularly evident for litigation cases that are more likely to require a lawyer CEO’s legal expertise, and less so for cases that require non-legal expertise (such as accounting irregularities or patent infringement). 

• Relative to non-lawyer CEOs, lawyer CEOs are less likely to issue pre-warnings prior to material settlements, especially for cases that result in high settlement losses. 

How was the study designed?

The researchers compiled a hand-collected sample of litigation loss contingency disclosures from 1993 to 2017 from more than 3,000 U.S.-listed companies. They also collected personal information about top management and boards of directors from multiple sources, primarily the BoardEx database. Executive compensation information came from ExecuComp and proxy statements. 

What do I need to know?

This study confirms the value of a legal education for CEOs whose firms face litigation challenges. 

With their superior knowledge of the law, lawyer CEOs play their cards shrewdly. They are quicker than non-lawyer CEOs to disclose information on pending litigation at an early stage to satisfy investor needs. But at a later stage, when they want to deprive opposing counsel of any ammunition, they know how to avoid disclosing potentially high costs of litigation while staying on the right side of the law.

“Because lawyer CEOs know better how to defend themselves when being challenged by other parties such as auditors and regulators,” the researchers note in their paper, they “withhold the disclosure of bad news about a pending litigation case, thereby avoiding ‘tipping one’s hand’ to opposing counsels.” 

This study is a reminder that the background and training of CEOs shape how they approach their jobs. Research shows that CEOs with technical backgrounds are more likely to increase innovation, while those with a strong financial background can be counted on to devise sophisticated financial and investment policies. And if your firm is going through a crisis, you certainly want someone with a military background in the C-suite.

Lawyer CEOs have long been known as conservative leaders, perhaps a reflection of how a legal education discourages risk taking. This can be an asset. One study found that firms led by a lawyer CEO have higher stock market liquidity than non-lawyer run firms because they are believed to reduce firm risk. Firms led by CEOs with legal expertise are associated with less stock price delay, less volatile market reactions to corporate earnings announcements and lower insider trading profits.

Another found that CEOs with legal training are associated with both lower litigation frequency and less severe litigation—up to 74 per cent less litigation depending on the type of lawsuit. They are also associated with higher value and operating performance, but only in high-litigation and high-growth industries. Outside of those industries, the benefits that lawyer CEOs bring are outweighed by their cautious corporate investment policies that are a drag on cash flows and growth.

That kind of caution is a natural outcome to an education in law. Frank Blake, the former CEO of Home Depot, described it best: “Law school consists of taking normal people and getting them to worry about what no sane person would worry about.”

Study Title: CEOs’ Legal Expertise and Strategic Disclosures of Litigation Loss Contingencies

Authors: Feng Chen (Rotman School of Management); Yu Hou (Smith School of Business); Gordon Richardson (Rotman School of Management); Barbara Su (Fox School of Business)

Published: Working paper available for download