Board Composition—Old Wine in New(er) Bottles

It’s a pleasure to join Concurring Opinions this month. The internet can be a little touch-and-go in China—I was in central China last week, with only limited access—but I hope to contribute some thoughts as the “Beijing correspondent” over the next few weeks.

For those who have not yet been to Beijing, let me commend it to you. Beyond the tourist attractions (and there are many), there is much going on in China as the country begins to lower the cost of central government, enhance domestic consump¬tion (and inward investment), and promote a deeper capital market. Every day brings something new.

Perhaps as surprising is the ubiquity of U.S. corporate governance—in particular, the director-monitor model—as a standard against which domestic alternatives are measured, notwithstanding some fundamental differences in corporate structure and financial markets.

As some may be aware, my co-authors and I recently addressed the role of directors beyond monitoring in a working paper, entitled Lawyers and Fools: Lawyer-Directors in Public Corporations (available here; forthcoming, The Georgetown Law Journal).

Specifically, we analyze the effect on firm value of directors with legal training (“lawyer-directors”) who sit on the boards of public, non-financial corporations. Beyond monitoring, directors with legal training help manage litigation and regulation, as well as structure compensation to align CEO and shareholder interests.

On average, a lawyer-director increases firm value by 9.5 percent, and when the lawyer is also a company executive, the increase rises to 10.2 percent. During our sample period, 2000-2009, the result was an almost doubling in the percentage of public companies with lawyer-directors.

A particular focus of our argument is that, beyond internal agency costs, external factors can shape the board and its organization. Which directorial skills are optimal will be affected over time by changes in the firm’s operating environment.

What that suggests is that a one-size-fits-all approach to the board may impose a less-flexible, less-efficient model of corporate governance on organizations with different needs and characteristics.

None of that should be too surprising to U.S. corporate academics. It suggests, however, that what is optimal for U.S. firms is likely to be less so in a political economy that is as fundamentally different as China’s.

As the new Chinese government begins to implement its reforms—and they appear to be quite serious in doing so—what will be interesting is whether China’s regulators can begin to adapt Western concepts of corporate governance to a new(er) Chinese model that reflects the local government, economy, and environment.

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