A Compelling Case For Lawyer-CEOs
Michael G. Cherkasky is not an obvious candidate to run the world's largest insurance brokerage. A former district attorney, the new boss at Marsh & McLennan Cos. (MMC ) has spent much of his career chasing crooks and has virtually no experience in financial services.
But Cherkasky has one credential that outweighs all of his obvious shortcomings: a close relationship with Eliot Spitzer -- who used to work for him in the Manhattan district attorney's office. On the day Cherkasky was elevated to CEO at Marsh in late October, the threat of a potentially lethal criminal charge against the reeling company by the New York State attorney general suddenly evaporated.
Cherkasky belongs to a specialized breed: lawyer-CEOs. They're a lot more common than you probably think. Other members of the group include Kenneth I. Chenault (American Express (AXP )), Richard D. Parsons (Time Warner (TWX )), Charles O. Prince III (Citigroup) (C ), Sumner M. Redstone (Viacom (VIA )), and Franklin D. Raines (Fannie Mae (FNM )). According to headhunting firm SpencerStuart, 10.8% of the CEOs of companies in the Standard & Poor's 500-stock index have law degrees.
Nearly all of these executives have had to overcome a common prejudice: that lawyers make bad corporate leaders. Often unschooled in core skills such as accounting or finance, lawyers start their careers in a strange world where risk is frowned upon, colorful marketing is unethical, people rarely work in big teams, and nobody makes a decision without reviewing stacks of paperwork first. Business attorneys are often considered the "vice-presidents of No," says Jeffrey A. Sonnenfeld, associate dean of executive programs at Yale School of Management. So it is hardly surprising that, as Sonnenfeld says, "people do ask questions when a career lawyer becomes a CEO."
There has never been any systematic study analyzing how lawyers do in the corner office. But anecdotal evidence indicates that the stereotypes aren't entirely justified. For every corporate attorney who has bombed as a CEO -- the most often cited example is former Time Warner chieftain Gerald M. Levin -- there has been a seemingly equal number of successes, such as Viacom's Redstone and Southwest Airlines' ex-CEO and current board Chairman Herbert D. Kelleher.
This shouldn't come as a surprise. Law schools, after all, are a rich source of intelligent and driven people. Moreover, the attorney-CEOs interviewed by BusinessWeek also believe that they gained a useful set of analytic skills in their journey from torts class to the courtroom. These include the ability to mediate disputes, see both sides of complex issues, and cut self-satisfied experts down to size. "A lawyer who comes in and asks basic questions about first principles can be more strategically creative in times of great change" than people grounded in a particular industry's culture, says ex-antitrust litigator Michael J. Critelli, now CEO of office equipment manufacturer Pitney Bowes Inc. (PBI ).
There was a time in the first half of the 20th century, before the proliferation of MBA programs, when law school was a common path for corporate leaders. Since then, attorney-CEOs have been concentrated in heavily regulated industries -- or to put it another way, in businesses in which legal issues have a greater effect on profits than, say, marketing or operations. Think utilities (Exelon's (EXC ) John W. Rowe, Dominion Resources' (D ) Thomas E. Capps, and many others); airlines (Southwest's Kelleher); and financial services (Fannie Mae's Raines).
When lawyer-CEOs emerge outside classic red-tape industries, they tend to be brilliant overachievers who would rise to the top of the heap no matter what their educational background. Bored with their legal practices, envious of the enormous paychecks earned by their corporate bosses, they seek out new adventures in the executive suite. "Lawyers are basically [just] advisers," says Time Warner CEO Parsons. "At the end of the day, we all want to drive the boat."
One challenge that confronts most lawyers when they cross over to the business side is their lack of financial expertise. Some learn how to work with numbers on the job. Others get specialized training. Curtis H. Barnette, who joined Bethlehem Steel Corp.'s legal department in 1967 and served as chief executive from 1992 to 1999, spent two summers in the 1970s taking accounting classes at Harvard Business School. In the case of American Electric Power Co. (AEP ) CEO Michael G. Morris, a chief accounting officer at a company where he worked several years ago "really took the time to help me understand it all," he recalls. "It was like a tutorial."
Of course, finance and accounting can be learned. What's sometimes harder is the unlearning process: the challenge of transcending the work habits absorbed during a career in the law. Most top lawyers are essentially solo artists. The most famous litigators and mergers-and-acquisitions lawyers in America rarely lead teams of more than a dozen or so people. They are paid primarily for their advice -- not for their ability to motivate others. They rarely face the type of quarterly and annual production targets that define the life of a corporate executive. "I had an adaptation process," recalls Pitney Bowes's Critelli. "I appeared to some of [the company's managers] to be very disorganized when I took over."
Risk aversion can be another problem. People who go to law school rather than B-school tend to be more cautious. After all, they're choosing a career that holds out the prospect of a guaranteed good income -- rather than a small chance of a spectacular one. What's more, the main goal of business lawyers is not to maximize profits but to minimize danger. "Good CEOs have to be able to make tough, bold decisions in the face of uncertainty -- and that's hard for lawyers," says James C. Gaither, a former corporate attorney who is a managing director at the Silicon Valley venture capital firm Sutter Hill Ventures. "Lawyers want to keep working until they find the perfect answer."
But a legal background does have some compensating virtues. The most important one, these days, is that it trains people to think about hot-button issues such as corporate governance and the social responsibilities of big companies. As a CEO, "your constituents today are stockholders, employees, customers, and the public generally," says ex-Bethlehem CEO Barnette. "Dealing with the press, dealing with Congressional committees...all of these external affairs issues are things the law prepares you for."
And of course, when a corporation finds itself in boiling water, then there's nothing like a lawyer to turn down the regulatory heat. In these days of corporate scandal, the arrival of Citi's Prince and Marsh's Cherkasky could herald a new species of lawyer-CEO: the credibility builder. Both men have been charged with creating new cultures inside their companies -- which involves erecting Chinese Walls, revamping ethical codes, and generally upgrading internal policing. This all plays to the core competence of business attorneys. "Lawyers are very structure-oriented, and that's what governance is all about -- changing behavior by changing corporate structure," says Charles M. Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware.
The number of lawyer-CEOs is only likely to grow, so long as New York AG Spitzer and his ilk continue cracking down on Corporate America. But scandals will ultimately take the legal profession only so far. While lawyers can make fine CEOs, they also come with plenty of baggage. Bottom line: Don't look for the JD degree to replace the MBA as the credential of choice anytime soon.
By Mike France, with Louis Lavelle, in New York