Companies run by lawyers (who’s complacent?)

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.


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. One measure we used was current accruals, where managers accelerate recognition of revenues and delay recognition of expenses. Lawyers were much less aggressive in accrual accounting relative to industry levels.


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.

That is all from M. Todd Henderson, more at the link.


I mean. Duh?

Lawyers gonna lawyer.

I wonder what the country-by-country variation in proportion of companies run by CEOs looks like. Is it affected by regulatory environment? I would imagine so

I saw this kind of study back in the 80s.

CEOs with legal backgrounds have fewer legal issues. And CEOs with accounting backgrounds have fewer accounting issues, with finance backgrounds fewer financial issues, and so on for manufacturing, marketing, even IT. Which background gives produces better stockholder value? It depends.

If lawyers were better CEOs in the dimensions that matter most, the market would see to it that more than 9% of CEOs were lawyers.

Yes, perhaps would have been good to see if returns were different with this more cautious approach by legal CEOs. My guess is that caution about things helps in some areas (reduces risk) but also results in lost opportunities.

In terms of why legal CEOs are more cautious on legal matters, maybe it is the case that if you have a hammer every problem looks like a nail. In my area I see senior managers who are engineers trying to make engineering decisions rather than managerial or strategic decisions because that's what they know. Sometimes that is a good thing, sometimes a bad thing (they believe a certain thing is not a good technology perhaps not based on recent experience, but outdated experience).

Exactly. The difference in approach to legal issues is only significant as it impacts ROI. If taking on the risk of more lawsuits & audits yields more, net ROI, than the cautious attitude of lawyer executives is counterproductive.

Seems like that should have been the major point, if it didn't impact ROI. So I have to guess either it did affect ROI adversely, or they didn't research the point at all. In both cases, less reason to read the whole thing.

Lawyers and earnings management: I suspect that lawyers are more conservative due to risk aversion and to ethics. As to risk aversion, lawyer CEOs tend to come from a business law background, where risk aversion is a big part of the legal work (business lawyers will know what I mean). As to ethics, lawyers are trained to represent a client zealously but not unlawfully or unethically Thus, lawyers will collaborate with clients in planing and implementing tax avoidance but not tax evasion. While that may be an obvious distinction (one lawful the other unlawful), It may come as a surprise to non-lawyers that it's unethical for a lawyer to advise a client to take action that would breach a contractual obligation of the client. That's not to say that all lawyers follow the same rules of ethics, because they don't. But lawyers who reach the pinnacle of the profession typically do. Many years ago I was trained to be a tax lawyer. My foreign tax professor was recognized as a leader in the field. Foreign tax is a very complex area of tax law, the dividing line between tax avoidance and tax evasion often opaque. I briefly considered a career specializing in foreign tax, because the number of specialists were few and the compensation they were paid relatively high. I chose not to. Why? Because the dividing line between tax avoidance and tax evasion was (and continues to be) opaque, and the temptation to cross the line too great. It never occurred to me at the time (this was 40 years ago) that the line between tax avoidance and tax evasion would shift so far that tax evasion hardly exists. Indeed, it has shifted so far that CEOs of companies engaged in what was once considered tax evasion were welcomed to Congress as heroes. Of course, the dividing line between ethical and unethical conduct has shifted even further, to the point where ethical conduct is equated with conduct that one can get away with.

the implication being that non-legally trained CEO ignore the advice of their legal department?

I am looking for the paper that he wrote, but Mike Scherer, former Chief Economist of the FTC, did a study about 20 years ago on corporate performance and CEO background.

Mike told me that lawyers came out second in terms of how well their firms did, but this was much higher than firms which had accountants and former CFO's as there Presidents.

The winners were: Engineers.

Mike speculated that engineers were in a better position to assess technology risks, guide and oversee R&D, spot trends, weed out bad projects and pick good ones.

As a lawyer, I was disappointed.

I did ask: were there any economists in his study and how did they do. He said he would get back to me.

Maybe he was thinking of Larry Summers.

Engineer CEOs only appear at tech companies. Tech companies are higher risk than non-tech companies and thus require a higher return on invested capital to secure investment.

Obviously you are not going to have an engineer as CEO of a bank, but I believe that Sherer corrected for this by excluding finance and focusing on other industry classifications excluding finance, such as manufacturing and service industries. It is not the case, by the way, that engineers are only in tech companies.

If he had included finance I bet lawyers would have even done better.

Stormy, I'll see if I can find the paper.

Stormy, Here's one of the papers. You're right in the sense that it focused on R&D intensive businesses.

"This paper analyzes data spanning 17 years on R&D expenditures and the educational background of top managers for 221 relatively research-intensive U.S. corporations. The fraction of companies for which at least one of the top two executive officers was educated in science or engineering peaked at 71.5 percent in 1980 and declined slightly thereafter. Controlling for profitability and the industrial fields in which the companies operated, having a science or engineering-educated leader is associated with more intensive support of R&D. A positive interaction between technical and legal education is detected."

Thirty-three percent of the S&P, as of last year, had a CEO with an engineering degree, but tech firms made up only 25 percent of index.

" did ask: were there any economists in his study and how did they do."

Twenty years ago, there was at least one that I know of. His company did really well for a while. Then it didn't:

In Lay's defense, he had turned the operations over to an HBS MBA and those guys struggled in the first decade of this century.

So that's what happened to the country of the Fords, Jobs, Redenbachers, Edisons and Gates. It is now controlled by lawyers...
"For example, if my neighbour has a mind to my cow, he has a lawyer to prove that he ought to have my cow from me. I must then hire another to defend my right, it being against all rules of law that any man should be allowed to speak for himself." - Jonathan Swift

As the old proverb goes: "A man who is his own lawyer has a fool for a client"

Lawyers run better companies; defensive medicine has saved many lives. Then there's Chuck Prince of Citigroup...

From Tips My Dad Says: (

"My father (a lawyer) told me, "Company culture is driven from the top - if it's the people who make the product, you're good; sell the product, you're ok; if the accountants take over, look for another job; and if the lawyers take over, run as fast as you can!" - Alden Hart

Isn't this section bias? You're hiring a lawyer to be CEO if you're "in industries with high litigation risk." So, I guess the conclusion is people do the jobs for which they are hired.

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