Since passage of the Sarbanes-Oxley Act of 2002, public companies have been more enthusiastic than ever about appointing independent directors with specific expertise. They have often reached into the academy to recruit university professors, where expertise and independent thought thrive. The number of professors on public company boards has tripled since 2002, and the number with law degrees has nearly doubled. Today, nearly one in eight public company directors is a professor and nearly half of all public companies have an academic on the board. The results have been positive, as evidence discussed below shows that these groups are associated with significant increases in firm value.
Yet there are no more corporate law professors on public company boards today than in the 1990s. A comparison of directories of corporate law professors with public company board slates shows that at most 20 of today’s roughly 1,000 law professors are on public company boards, about the same as before SOX.
The relative dearth of corporate law professors on public company boards may be the result of a mutual lack of interest – those who would perform well aren’t interested, and companies prefer to fill the small number of slots with those having management experience. Whatever the reason, though, it’s clearly a missed opportunity.
Pre-SOX Boards Dominated by Businessmen
Before SOX, boards were dominated by business executives, and the handful of academics serving as directors tended to be specialists in the company’s field – medicine for pharma or engineering for aerospace – or university presidents. Lawyers rarely served, with occasional exceptions of senior partners of long-time outside firms or general counsel. Only a handful of corporate law professors could be found, such as Roberta Karmel of Brooklyn Law School, who joined the board of Mallinckrodt Pharmaceutical, a U.K. company, in 1980, and Bernie Black of Columbia Law School, who served on the boards of Homeland Holding Corp. and a large Korean bank.
In 1997 interviews with three CEOs in the trade periodical, Directors & Boards, each endorsed the lone professor on his company’s board, but with only moderate enthusiasm, choosing to stress the general skills all directors must possess. As for special skills, the executives said that academics tended to be independent – if a bit too theoretical – thinkers who asked the right questions and, by looking at problems differently than businessmen do, offered a unique perspective that added diversity to corporate deliberations.
A few years later, Canadian business school professors Michael Maher and Malcolm Munro advocated for recruiting business school professors as directors, lauding their “natural talents, intensive training, unique skills, diverse expertise, independence and availability.” After lamenting that only 4 percent of Canadian directors were academics, and only a few of those were from business schools, Maher and Munro cited the Directors & Boards piece to argue that senior business school professors are ideally positioned to ask the right questions.
While the authors attributed the dearth of academic directors to search myopia or professorial passivity, critics such as Nancy Goldschmidt and James Finkelstein questioned the fit between classroom and boardroom values. Reporting that one-third of presidents of top universities were public company directors, they asked whether this should stoke “worry about corporate influence in higher education” and whether such board service promotes the “corporatization” of higher education, an “academic capitalism” where market forces rather than academic judgment influence outcomes.
Enlarged Boards Draw Academics and Lawyers
Attitudes soon changed after SOX was enacted in 2002 and expanded the demand for directors with independence and expertise, especially in financial reporting and compliance. By 2011, one-third of S&P 1500 companies boasted an academic as a director, stimulating several new research articles on the phenomenon.
A 2014 study in the Journal of Finance stressed that academics are not homogeneous but have deep expertise that can be useful in addressing specific corporate issues while also offering a company more social and business connections, prestige, or monitoring capacity. The study reported more than 400 public companies adding academics to their boards over a recent 12-year period. Of these, 60 percent were administrators, 26 percent were business professors, and 14 percent specialized in other areas. Law professors, whom the authors lumped in the business segment, accounted for less than 1 percent of the appointments, a total of 19, with five held by a single professor, Charles Elson of the University of Delaware.
A 2015 study in the Journal of Financial Management reported that 40 percent of the companies in the S&P 1500 had academics as directors, and 14.3 percent of those were outside directors. The authors found that academics had stronger ethical reputations and fewer direct connections with insiders, were independent and critical thinkers, and, as a result, brought new perspectives to the boardroom. The authors also found, however, that academics tended to emphasize scholarly rigor over firm performance, had only narrow business experience, and faced conflicts between the interests of their companies and their universities.
Perhaps more important, the study found that the “presence and relative size of academic directors on the board have a statistically significant and economically meaningful impact on firm performance measured by Tobin’s Q [essentially the ratio of market value to book value] and return on assets” – 3.5 percent and 3 percent higher, respectively. The study attributed these benefits to, for example, more effective governance, as academic directors had superior attendance and committee memberships; oversight, as CEO cash compensation was lower and equity pay higher at firms with academic directors; and financial reporting quality, as such firms had lower levels of discretionary accruals. The authors also found that business school professors had the “most positive impact.”
As for lawyers, the literature is more limited. A 2014 Georgetown Law Journal article studying directors with legal training found that, from 2000 to 2009, their numbers nearly doubled, prompting both a “statistically and economically significant increase in firm value (measured by Tobin’s Q) of nonfinancial companies . . . [of] 9.5%, and when the lawyer-director is also a company executive, the firm’s value increases by 10.2%.” The authors theorized that these gains were due to “a lawyer’s training and experience, and the judgment that comes with it,” promoting better monitoring, better management of risk and litigation, and a propensity for compliance. They opined that the results could not be replicated by a board retaining legal counsel, but accrued as a result of the lawyer’s role as a peer on the board.
Corporate Law Professors on Post-SOX Boards
Law professors have not, however, been joining boards post-SOX in numbers as proportionally high as other academics have. One reason could be search limits: Boards and executive recruiters have traditionally targeted far more candidates at business schools than at law schools; those who’ve come to appreciate lawyerly value on boards may find ample supply among the practicing bar. On the supply side, law professors as a group may be prepared to promote their articles and ideas but less eager to market themselves and their prospective business judgment.
What of the generally supposed advantages academics offer? Corporate law professors are undoubtedly independent thinkers who look at things differently and face fewer conflicts. They certainly command knowledge of corporate governance. Many have a deep understanding of financial markets. Many engage in interdisciplinary work with other relevant university departments, such as accounting, economics, and finance. They know statistics and economic modeling. They are informed and intelligent and have great capacity to absorb and digest massive quantities of complex information. They understand corporate conflicts and how to resolve them.
Ultimately, however, it is a question of fit. The empirical research shows that academics are most likely to be directors at large, research-driven firms where CEOs own substantial percentages of the equity, or at small or niche companies, such as new spin-offs or off-shore companies. Many corporate law professors would be an ideal fit for the boards of mutual funds, where required oversight is highly regulatory-driven.
For most public company boards, the premium remains on managerial experience, according to my interviews with a dozen law professors with board experience. Indeed, almost all those I interviewed said their directorships arose for reasons other than being corporate law professors – one said despite that. Examples included prior service as a law school dean in the case of Bob Clark or SEC commissioner in the cases of Joe Grundfest and Roberta Karmel.
Two poignant comments stood out, however, providing takeaways for those corporate law professors reading this who may be interested in public company board service. First, Bernie Black, now at Northwestern, reflected “I could have looked harder for opportunities, but none came to me.” Jon Macey, now at Yale, said he did not want to be quoted about his roles, given confidentiality concerns, answered my queries by saying: “My guess is that few corporate law professors serve because those who are qualified lack interest.”
David B. Audretsch & Erik Lehmann, Entrepreneurial Access and Absorption of Knowledge Spillovers: Strategic Board and Managerial Composition for Competitive Advantage, 44 Journal of Small Business Management 155 (2006)
Francis, Bill, Iftekhar Hasan & Qiang Wu, Professors in the Boardroom and Their Impact on Corporate Governance and Firm Performance,” Journal of Financial Management (Fall 2015)
Nancy P. Goldschmidt & James H. Finkelstein, Academics on Board: University Presidents as Corporate Directors, 87(5) Academe 33-37 (2001)
Krishnan, Wen & Zhao, Legal Expertise on Audit Committees, 86 (6) The Accounting Review, 2099 (2011)
James S. Linck, et al., The Effects and Unintended Consequences of the Sarbanes-Oxley Act on the Supply and Demand for Directors, 22 Review of Financial Studies 3287 (2009)
Lubomir P. Lrrow, Simone M. Sepe & Charles K. Whitehead, Lawyers and Fools: Lawyer-Directors in Public Corporations, 102 Georgetown Law Journal 413 (2014)
Maher, Michael & Malcolm Carlyle Munro, Today’s Board and the Academic Option, 64(6) Ivey Business Journal 8 (2000)
James G. Tompkins, Recruiting Professors as Board Members, Directors & Boards, Winter 1997
Joshua T. White, et al., Appointments of Academic Directors, 28 Journal of Finance 135-151 (2014)
This post comes to us from Professor Lawrence A. Cunningham at George Washington University Law School.