Diversity and the Boardroom 2014: Part III

Since I started writing about Diversity and the Boardroom 14 years ago I have often suffered from fatigue arising from the need to explain the basic concepts underlying the benefits of diversity. Here some basic points that too often seem missed: 1) diversity is not about morphological features such as skin color, hair, or geographic origins; 2) diversity has little if anything to do with the pseudo-science of race which has been proven again and again to be ill-founded; 3) the benefits of diversity arise from cognitive attributes such as different perspectives, experiences and insights; 4) as such diversity breaks down groupthink and affinity bias. All  of these facts mean that diversity is not about race or gender but rather information elaboration. Diverse groups bring broader cognition to the table, particularly when relevant diversity is plugged into any given institutional mission.

I recently came across an important study that essentially makes all of these points and highlights the multidimensional nature of diversity. A new study published in the Georgetown Law Journal finds:

The accepted wisdom—that a lawyer who becomes a corporate director has a fool for a client—is outdated. The benefits of lawyer-directors in today’s world significantly outweigh the costs. Beyond monitoring, they help manage litigation and regulation, as well as structure compensation to align CEO and shareholder interests. The results have been an average 9.5% increase in firm value and an almost doubling in the percentage of public companies with lawyer-directors.

A 9.5 % valuation gain is huge. Can it really be so? Yes, and the finding is very robust:

In fact, based on an average of 10,000 or more observations from 2000 to 2009, we find a statistically and economically significant increase in firm value (as measured by Tobin’s Q) of nonfinancial companies that have a lawyer on the board. A lawyer-director increases firm value by 9.5%, and when the lawyer-director is also a company executive, the firm’s value increases by 10.2%. The result has been an almost doubling in the percentage of public companies with lawyer-directors from 2000 to 2009. (p. 415).

So why do lawyers add so much value? Well for one thing lawyer-directors are more likely to assure legal compliance, as demonstrated by the fact that "the presence of a lawyer-director significantly lowered the likelihood of stock-option-backdating litigation." (p. 452). "Lawyer-directors also have a risk-reducing effect on CEO compensation and the overall level of risk a firm will assume." (p.472).

In the end lawyers on boards add diversity:

Lawyer-directors bring special skills to the board that can affect board decisions and firm behavior. Experienced practitioners offer a perspective on litigation and regulation that can benefit the board’s deliberations. Moreover, trained in advocacy, a lawyer-director’s willingness to pursue a particular course of action—potentially at odds with others on the board—can bring a diverse and valuable perspective to board discussions. (p. 425).

Essentially lawyers provide boards with more elaborate information and knowledge than boards without lawyers. Just like gender and and race under-represented groups (of any gender or race) add to the cognitive mix of the group. A necessary extension of this is that white males may bring diverse perspectives and experiences to a board otherwise lacking white males. It is about cognition not morphological features.