LEGAL
Does having your company’s general counsel (GC) serve on your board of directors make an impact on how your company solves problems, strategizes, and approaches diversity? Does it in fact increase your company’s revenue performance?
These are some of the questions we are seeking to answer with a new statistical study of corporate boards that include their company’s GC. The research study is being coauthored by myself and Yann Cabon, a statistician and researcher with a specialty in big data and mathematical modeling.
Our study came about because we know that over the last two decades, corporate boards have undergone substantial external and internal change. Thus far, however, in both theoretical and empirical work, companies have not focused on the effect of including their GC on their board and how that impacts the performance and other abilities of their particular board structure. With this study, we are filling this gap.
We set out to determine whether there was a measurable impact when a company includes its own GC on its corporate board. We know that lawyers think differently, and they have a different way of solving problems. That is valuable for a board, even if the lawyer is not providing legal advice at the moment. Overall, the fact that GCs are all in-house lawyers will bring their values and their preferences to the board and will help move it to consider that perspective.
Also, we know that GCs are very good at bringing together opposing viewpoints and building consensus – all of which is very important for the boardroom. But next to that, GCs tend to also be very sophisticated in understanding their firm’s global outlook and how the market keeps changing, which also may bring a different kind of insight to the group.
Then there is another element that GCs contribute to, which is the diversity of the board structure itself.
In the study, we’ve not only included diversity in terms of gender, ethnicity and age, but also in types of skills and in the job titles that one may hold. Indeed, we are looking at the diversity of the group by examining the characteristics of an individual who is a GC and part of the board.
For example, in the gender difference, past research has shown that a company that has a board with more women on it will outperform those companies with less diverse boards. This research has found that companies with diverse boards will achieve a better return on revenue and a better return on equity.
Also, we have found that boards with GCs are more likely to have more women on their boards – and that’s significant. Of course, there is the chicken-and-egg question, because you never know which one led to the other one.
Our research is contributing something else, which is the impact of the economic value that one individual – the GC – can contribute to the board. We are looking at how that involvement evolves – especially in time of crisis – and how the GC board members have become a critical component in the way company boards function going forward.
What we have found is that from 2006 to 2014, the number of GCs on boards increased by 11%. As the high peak of the financial crisis hit in 2008, companies with boards that included their GC were more likely to have higher revenue performance, even during this time of crisis, than the companies who did not have their GC on their board.
Corporate boards with GC vs. without GC
Our statistics show the outperformance of corporate boards that include their GC as compared to the performance of companies whose boards do not. In fact, you can see clearly how this trend was really formed during the financial crisis and has held strongly in place ever since, even though the performance of companies with non-GC boards has improved since the end of the financial crisis.
Our research has led us to several hypotheses that we are developing around our work. One of our hypotheses is that in time of crisis, boards are more likely to include their GC than previously; in fact, this crisis is the trigger that ultimately brings the GC on the board. That is why, during the years of the financial crisis, you see that GC inclusion was on the rise and becoming very important to corporations.
Corporations have come to realize that their GC, because they are lawyers, have different training than that of most other board members. That perspective can make a significant contribution to how boards solve their problems, communicate between board members and to the company, and seek consensus.
And interestingly, there was something else we found. We had built on previous research that showed a very strong correlation between the size of a company’s board and how well it functions. We know that overall, the larger the board, the more likely it is to encounter communication and coordination problems – so, smaller boards tend to be better boards.
However, we saw through our research that boards with a GC on them are more likely to be smaller boards than boards without a GC, which probably contributes to their being better performing boards.
We also saw that the board size is often changed due to regulatory empowerment. For example, the Dodd-Frank Act in 2010 and the Sarbanes-Oxley Act in 2002 led companies to change how their board directors were being selected and compensated, with some companies changing the makeup of their boards in response and often modifying their size.
I am excited to contribute to the literature around this important subject, which will give companies more to think about in the future as they decide on the composition of their boards.
This piece originally appeared in Forum Magazine.
Paola Cecchi-Dimeglio is chair of the Executive Leadership Research Initiative for Women and Minority Attorneys at Harvard Law School’s Center on the Legal Profession and a senior research fellow, jointly appointed at HLS and at Harvard Kennedy School. Prior to joining Harvard, Cecchi-DiMeglio was a practicing attorney for Landwell & Associés (now PricewaterhouseCoopers International Ltd.) and Baker McKenzie.
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