Law Schools

Lawyers Make Better Business Leaders Than MBAs

Yet another thing lawyers do better.

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Whenever anyone mentions B-school, I’m reminded of a scene in Futurama when a super-intelligent simian decided to embrace a slightly dumber lifestyle.

All I want out of life is to be a monkey of moderate intelligence who wears a suit. That’s why I’ve decided to transfer to business school!

But even if we’ve long settled that lawyers are smarter than MBAs — and within the confines of this legal industry audience, that’s well settled — at least the business monkeys can take comfort in knowing that they’re better at business than the juris doctors out there.

Or maybe not. A new piece by Professor Todd Henderson in Harvard Business Review suggests that legal training may actually make for much better CEOs. Contrasting Bank of America’s steady success with Wells Fargo’s effort to drive their stagecoach over the cliff, Henderson points out a key difference:

One possibility is the tone at the top. For the past several years, Wells Fargo has been run by MBAs, while Bank of America’s CEO since 2010, Brian Moynihan, has a law degree from Notre Dame. Might this difference in education influence how CEOs behave when it comes to setting a course and trimming corporate sails? After all, there’s a subtle difference in how these two disciplines train people to understand and manage risks: Legal training focuses on the downside of particular actions, while business training may emphasize the upsides for shareholder value from risk taking.

An interesting theory. It sounds good on paper. But Henderson and his collaborators (Irena Hutton, Danling Jiang, and Matt Pierson) put it to the test, compiling data on about 3,500 CEOs associated with nearly 2,400 publicly traded firms in the S&P 1500 from 1992 to 2012 and focused on the business decisions made by the CEOs with MBAs and those with law degrees.

The result was clear: Firms run by CEOs with legal expertise were associated with much less corporate litigation. Compared with the average company, lawyer-run firms experienced 16% to 74% less litigation, depending on the litigation type. Employment civil rights, antitrust, and securities lawsuits were reduced the most, while contract saw the smallest (but still significant) reduction with a lawyer CEO. The results were economically meaningful, since the reduction was several fewer suits per year in some cases.

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When they dug deeper, they found that less litigation really was “consistent with active risk management by the CEO.” Lawyers know how to protect the company, man.

But before you start sending your résumé out to every Fortune 500 company, there’s only a few industries that may appreciate your legal acumen.

We found that CEOs with legal training were associated with higher firm value, but only in a subset of firms, specifically, in high-growth firms and firms with large amounts of litigation. Outside of this setting, however, the effect of CEOs with legal training on firm value was negative. So companies in, say, the pharmaceuticals and airlines industries performed better when run by lawyer CEOs, all else being equal, while companies in, say, printing and publishing performed worse. This is perhaps because in low-litigation industries the benefits of less litigation are offset by lawyer CEOs’ overly cautious firm policies, which can negatively affect cash flows and growth.

That’s why, according to Henderson’s data, only around 9 percent of CEOs have law degrees.

You knew there had to be a catch, right? Frankly, if there weren’t a catch Professor Henderson would already be gunning for a corner office because (we all know he needs the money for private schools and home helpers). But, no, these sorts of “JD Advantage” jobs aren’t just lying around. If they were we’d never hear the end of it from cut-rate law schools touting their one CEO and hoping you overlook the boulevard of broken dreams that exits out of the commencement hall.

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Still, the next time your business school buddies try to throw some weight around, casually remind them that you’d run a bank much better than they would. It might not convince them at the time, but they’ll come to appreciate you in a few years when you’re helping them with that insider trading rap.

Do Lawyers Make Better CEOs Than MBAs? [Harvard Business Review]

HeadshotJoe Patrice is an editor at Above the Law and co-host of Thinking Like A Lawyer. Feel free to email any tips, questions, or comments. Follow him on Twitter if you’re interested in law, politics, and a healthy dose of college sports news.

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