By Debra CopeAs nominating committees consider their board candidate mix, they might want to take note of a new study that documents the rapid rise of lawyers on bank boards.
Lawyers now occupy seats on three-quarters of U.S. bank boards, and new evidence suggests their rapid rise is linked to improved risk management and increases in bank valuation.
The research found that in 2017, 74% of banks had at least one lawyer- director, up from 42.8% of banks in 1999. The percentage reached a high of 76.5% in 2014, before leveling off slightly. The average year-over-year increase in lawyer-directors on bank boards was 4.1%, while the total change in lawyer-directors from 1999 to 2017 was 73%.
The paper found that banks with lawyer-directors assume more risk in ordinary, non-crisis circumstances and less risk when a crisis arises, in ways that have tended to enhance value.
“Lawyer-directors do this by drawing on advocacy skills to critically analyze opposing points of view, an essential quality in managing the risks banks face today,” the paper found. “They are also more likely to make complex information, sourced from multiple experts, more accessible to a bank’s board as part of its decision-making process. Finally, lawyer-directors are skilled at assessing litigation and regulatory risks, which have grown significantly in recent years.”
The paper also concluded that having a lawyer on the board promotes increases in bank value. In the first year after a lawyer-director joined a bank, the bank’s value increased by 5.7% relative to the sample mean.
The authors said their findings challenge the assumption that stricter regulation is enough to promote efficient risk management. Instead, to manage a bank effectively, “directors must have the skills to think critically about risk,” they wrote. They said the findings also underscore the value of directors’ expertise. Specialized knowledge can enhance a director’s contribution to the board.
“Banks with lawyer-directors do more than simply minimize ‘bad’ risk. They also pursue ‘good’ risk under circumstances that are more likely to result in greater bank value,” the paper found.
The findings also underscore that board composition has an impact on how banks manage risk, the authors wrote. Lawyer-directors can do more than simply assess litigation and regulatory risks, they concluded; they “also add value by drawing on advocacy skills to critically analyze the risks that banks face, as well as by making complex information more accessible to a bank’s board.”
The paper was written by Scott B. Guernsey of the University of Tennessee; Saura Masconale of the University of Arizona Center for the Philosophy of Freedom; Simone M. Sepe of the University of Arizona Rogers College of Law, the University of Toulouse, and the European Corporate Governance Institute, and Charles K. Whitehead of Cornell Law School.