Thursday, April 21, 2022

This Article is the first to analyze a sea change in bank governance—the precipitous rise of lawyer-directors in the past two decades. Using novel empirical evidence, we show that lawyer-directors are associated with efficient changes in risk management and significant increases in bank value. Banks with lawyer-directors assume more risk in ordinary circumstances and less risk when a crisis arises, in each case making those banks more valuable.

Understanding that change in governance is vital in light of the COVID-19 crisis, which has transformed the risks that banks face. We show that—beyond new regulation, as others have proposed—having a director who “thinks like a lawyer” is likely to make boards more effective in managing new risks. Lawyer-directors add value to boards by drawing on advocacy skills to analyze opposing points of view, an essential quality in managing risk. They are more likely to make complex information more accessible to a board and to build a consensus among different points of view. Lawyer-directors, of course, are also skilled at assessing litigation and regulatory risks, which have grown significantly in recent years.

Our findings challenge the standard framing of the board. Improving board efficacy requires a more nuanced understanding than has happened to date of the effect on boards of board composition and directors’ skills. We use the example of bank lawyer-directors to begin addressing that shortcoming. Beyond banks, however, our findings underscore the need for a new approach to analyzing what really matters for boards and corporate governance.

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