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Lawyers Make Crappy CEOs

January 10th, 2007 by David Kronemyer · No Comments

In his column in today’s Wall Street Journal, Alan Murray discusses some of the reasons why companies hire lawyers as CEOs, Murray, A., “When Firms Turn to Lawyers,” Wall St. Journal (Jan. 10, 2007). I don’t know if it’s just me, but usually when I’m reading the paper in the morning, I don’t pay too much attention to specific words or phrases. Rather, I scan articles quickly to see if there’s anything of interest. If there is, then I pause and read the entire article.

For some reason, Mr. Murray’s column typically falls into this category. I end up reading the article, even though I don’t know he’s the guy who wrote it. Then, at the end, I see who the author is, and I think to myself, “Oh, it’s Murray again.” Which is another way of saying, for whatever reason, his thoughts, and the way he expresses them, resonate.

Mr. Murray’s thesis is, “companies in trouble” sometimes end up hiring lawyers as successor CEOs. “The latest examples: Home Depot and Pfizer. The two companies share top billing in the CEO pay-without-performance Hall of Shame. Their former chief executives, Bob Nardelli and Hank McKinnell, each walked away with roughly $200 million in parting compensation, after failing to deliver a penny to their shareholders. The boards of both companies then turned to lawyers to clean up the mess.” Mr. Murray goes on to cite Michael Cherkasky, now CEO at Marsh & McLennan; Dick Parsons, now CEO at Time Warner; and Chuck Prince, now CEO at Citigroup. Another recent example, not cited by Mr. Murray, is Philippe P. Dauman, now CEO of Viacom.

Why in the world would a business organization hire a lawyer as CEO? Says Mr. Murray, “Lawyers seem to get called in when companies have serious legal troubles, or when a charismatic leader leaves behind an unmanageable muddle. * * * Lawyers are trained to foresee risk, making them well-suited for times of trouble. Perhaps more important, they understand what it means to be a fiduciary, acting in trust on someone else’s behalf.”

Having been both a lawyer and a CEO, I would like to weigh in on this issue, by saying lawyers make crappy CEOs. The reason why is precisely the reason cited by Mr. Murray as one of their positive attributes: they are too risk-averse. Lawyers are mendicants to America’s corporate bureaucracy. Especially in the corporate world, they are trained to focus on potential reasons for not doing the deal. Or, on ways in which the deal could go wrong. This inquiry doesn’t necessarily concern “business” risks, such as paying too much, or uncertainty in the marketplace. Rather, it’s more about “legal” or “contractual” risks. For example, the financial reports could be misstated; there could be undisclosed environmental liabilities; the indemnification clause isn’t strong enough; etc.

All of this is necessary and appropriate, and I’m not bagging on lawyers per se. [That can wait until later!] Rather, these are exactly the skills you don’t want a CEO to have. A CEO must be aggressive and willing to take risk.

Take Google’s recent acquisition of YouTube, for example. The line of naysayers was a block long. “There’s too much legal risk,” they said. “Google will get sued into oblivion.” I think this was a terrific acquisition for Google, just like MySpace was, for Fox. It’s difficult to under-estimate the potential value of intellectual property rights in the new digital era. Google did what any sensible company would do in this type of situation: they established a reserve against potential third-party claims. And my surmise is, the reserve will end up being two or three times more than turns out to be necessary, to resolve any problems. Viacom, on the other hand, evidently shilly-shallied around, listening to its lawyers wail and moan, only to lose the deal.

If you don’t fail every now and then, you simply aren’t trying hard enough. Because of their constitution, background, demeanor, training and experience, lawyers never will want to take business risk. Confusing business risk with legal risk, they invariably will over-estimate the former. As a result, the company will chug along as usual, but gradually cease to be competitive, as it squanders more speculative opportunities.