© 2015 The Texas Lawbook.
By Mark Curriden
(Jan. 4) – New PIMCO board member Gary Kennedy poured through binders filled with thousands of pages of reports, analysis, financial data, internal memos and news clippings.
“The amount of information to absorb is incredible and my skills and training as a lawyer have definitely helped me in this new role,” says Kennedy, who retired in December 2013 after two decades as a lawyer at American Airlines. “As a corporate board member today, you cannot just show up for meetings and vote without having a true understanding of the issues.”
“I’ve loved every minute of it,” Kennedy says. “The issues we confront are cutting edge – cyber security, executive compensation, new financial regulations and corporate governance.”
Lawyers have always had a seat in the corporate boardroom, but where they sit at the table is changing. Those changes, which were triggered by the 2008 financial crisis, appear to be having a significantly positive impact on those businesses.
For decades, publicly traded companies limited the role of attorneys in board meetings to that of advisers – not deciders.
The reasoning was simple: lawyers were too risk-averse and too narrow in their professional focus. Business leaders believed that practicing lawyers brought nothing new to the boardroom that the company’s own general counsel didn’t already offer.
“Lawyers traditionally have not had the skill set that boards have sought,” says Lee Hanson, vice president of the executive placement firm Heidrick & Struggles. “Lawyers are rule-bound people. Lawyers are not historically known for being business-minded or strategic.
“Most corporate CEOs and board chairs say they have their own general counsel, so why do they need another lawyer in the boardroom,” she says.
Hanson, who placed Kennedy at PIMCO last April, and other business leaders say that mindset started changing about five years ago and Texas lawyers have been leading the charge.
Since 2010, more than a dozen Texas lawyers – many of them former corporate general counsel – have become directors at some of the nation’s largest publicly traded businesses.
In 2015, Irving-based Pioneer Natural Resources made long-time Vinson & Elkins corporate partner Mike Wortley a director and former Continental Airlines General Counsel Jennifer Vogel of Houston was added to the board of Virgin America. A year earlier, Irving-based Darling Ingredients made Dallas bankruptcy lawyer Mary Korby one of its directors and Texas Instruments added Gibson, Dunn & Crutcher senior counsel Ron Kirk to its board.
The average corporate board member is paid $177,000 annually.
During the decade leading up to the 2008 financial crisis, less than 24 percent of U.S. publicly-traded companies had lawyers on their boards, according to Corporate Board Member magazine. In the six years since the crisis, 44 percent of those companies reported having lawyers as directors.
Two significant shifts have taken place that “make this the right time” for lawyers, especially general counsel, to be attractive board members for companies, says Vogel, a former lawyer at V&E in Houston.
“Increased regulation, especially the passage of the Sarbanes-Oxley law [in 2002] changed the position of general counsel from just being a lawyer for a business to a being an executive involved in nearly every aspect of a company’s operation,” she says.
“Corporate lawyers deal regularly with corporate compliance and ethics, activist shareholders, cyber security, antitrust, intellectual property, labor relations and oversight by the U.S. Securities and Exchange Commission,” Vogel says. “By the way, those are the very issues that today’s corporate boards face.”
Hanson and other corporate headhunters say that chief executive officers and board chairs became more interested in adding expertise in corporate compliance and risk management to their oversight boards.
“Many of the same reasons that previously kept lawyers and general counsel from being chosen to serve on corporate boards are now viewed as benefits,” says former Exxon Mobil General Counsel Charles Matthews, who joined the boards of San Antonio-based Frost Bank and Dallas-based Trinity Industries in 2010.
The impact of adding lawyers to the corporate boardroom apparently had a positive business impact, according to a recent study.
A 2013 study by Cornell Law School found that companies that had a lawyer on its board of directors faced considerably fewer legal disputes over executive compensation, stock option backdating, antitrust and intellectual property than those without lawyers as directors.
The study “provides statistical evidence to suggest that having a lawyer-director resulted in an average 9.5 percent increase in a company’s value.”
“Lawyers can certainly provide unique insight in the corporate boardroom,” says former CenterPoint Energy General Counsel Scott Rozzell, who is now on the board of directors of Houston-based Powell Industries. “I think corporations are starting to see that value.”
Despite the increase since 2009, only 5.1 percent of the 3,900 directors at the publicly traded Fortune 500 companies are lawyers. And that includes many non-practicing lawyers, such as TPG Capital founder David Bonderman, who serves on the board of Dallas-based Energy Future Holdings, and Allen Finkelson, a retired law partner at Cravath, Swaine & Moore who is a long-time director at Irving-based Range Resources.
Kennedy says many companies believe that lawyers will simply bring their lawyering techniques into the boardroom door, but little other skills or assets.
“General counsel are not on the board to give legal advice,” he says. “They are there to ask tough questions, to provide constructive leadership on issues such as ethics, risk management and corporate compliance.
“Corporate boards leave valuable talent on the table by excluding general counsel and other lawyers from their searches for new board members,” he says.
PIMCO Chairman Brent Harris agrees.
“Gary’s legal training is merely a prequel to his knowledge, his experiences and his deep understanding of fiduciary duties and business controls,” Harris says.
“The fact that tens-of-millions of Americans put their life and safety in Gary’s hands as GC at American Airlines is very impressive,” Harris says. “We wanted to apply that kind of leadership and confidence in our operation.”
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