Firms fare better in litigation with lawyers CEOs, study finds

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Firms with lawyer CEOs may have an advantage in navigating litigation environments, a recent academic study suggests.  Researchers from four universities across the US found that lawyer CEOs are associated with both lower litigation frequency and less severe litigation.

The reduction was observed among the nine most common types of litigation: antitrust, contract, employment civil rights, environmental, intellectual property, labour lawsuits, personal injury, product liability, and securities lawsuits.

According to researcher M. Todd Henderson, lawyer-led 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,” he wrote in the Harvard Business Review.

Firms shouldn’t take litigation risks lightly.  The study presented the case of pharmaceutical giant Merck – in 2004, allegations surfaced that the firm’s arthritis drug Vioxx was causing cardiovascular damage to its users. It pulled the drug off the market and subsequently embarked on a multi-year legal battle with lawsuits filed in nearly every US jurisdiction.

“By 2007, Merck set aside a [US]$4.85 billion legal reserve to settle product liability claims, abandoning its position that it would litigate every claim; in 2011 it pleaded guilty to a federal misdemeanour with a [US]$0.95 billion penalty and, in 2016, agreed to a [US]$0.83 billion securities class action settlement.”  Then-CEO Raymond Gilmartin stepped down and was replaced by the company’s former president of manufacturing, Richard Clark.

Granted that there are a myriad of factors that influence a firm’s performance, the study said lower and less severe litigation is achieved in part through a decrease in activities that can lead to litigation (such as earnings management), and an increase in legal oversight by directors with legal expertise.

The researchers said lawyers represent only a small portion of CEOs – just 9.1% of the firms they studied – are run by CEOs with law degrees. “CEOs with legal training are associated with higher firm value, but only in a subset of high litigation, high growth, or pharmaceutical industries. Outside of this setting, the benefits of litigation reduction are offset by their cautious firm investment policies that negatively affect cash flows and growth.”

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