Skip to Main Content

Impact | Winner take all

Volume 20, Number 3
March 2014

The research of Brian Pinkham shows that having a legal education drives a CEO’s foreign investment decisions.

Pinkham-impact-14.jpgCisco Systems is famous for its remarkable story of growth through acquisitions. Since CEO John Chambers took the helm in 1995, Cisco has acquired more than 160 companies, both domestic and foreign. Chambers describes himself as a “command and control guy.” He also has a law degree. Is this just a coincidence? Or is a legal education a perfect background for pursuing an aggressive acquisition strategy?

Ivey Professor Brian Pinkham says that it’s becoming more common for lawyers to take on leadership roles in business, particularly in large multinationals. Pinkham, who himself holds two law degrees (JD and LLM) in addition to his MBA and PhD, has a research focus on international business institutions. “Because of the growing level of regulation, some firms are choosing lawyers to help anticipate legal changes in their business environments,” he says. “But it’s not clear to me that firms are looking at a person’s education and thinking about how that might drive international strategy.”

Pinkham is conducting a research study that explores the link between the education of CEOs and the foreign investment patterns of their firms. Although there has been some research on the effect of MBA degrees on corporate strategy, the effects of other forms of education receive less attention in the literature. His study sample includes CEOs of some 300 international firms, with equal representation from North America and abroad.

When firms enter foreign markets, they typically choose from three modes of investment: outright acquisitions, joint ventures, and strategic alliances. Acquisitions, the preferred approach of Cisco, is a way to secure high, individual control of the target investment. Joint ventures and strategic alliances, on the other hand, result in shared control.

Existing research suggests that shared control, through joint ventures or strategic alliances, has several advantages when investing in foreign markets. This approach mitigates a company’s exposure to the “liabilities of foreignness,” such as the challenges of learning about local business environments. “Despite the literature, my instinct was that lawyers would prefer higher modes of control, because that’s how they’re trained,” says Pinkham.

Although his study is not yet completed, Pinkham’s data confirms his hypothesis. He finds that CEOs with MBAs tend to prefer joint ventures and strategic alliances when they go abroad. CEOs with law degrees, on the other hand, prefer acquisitions. Interestingly, Pinkham also finds that when an MBA is paired with a law degree, the effect of the MBA is minimal compared to the law degree.

When Pinkham looked at other educational backgrounds, he found that those with science and engineering degrees also prefer higher control modes than MBAs alone. When they lead investment abroad, CEOs with science backgrounds have less need for control than CEOs who are engineers. But engineers have less need for control than lawyers. Humanities and arts backgrounds don’t appear to have any impact on the model.

Given his background in the law, Pinkham understands why lawyers tend to prefer higher modes of control. Their training, which is quite rigorous, tends to be confrontational and adversarial. Often, this leads lawyers to prefer contracts to handshakes.

Business students, on the other hand, are taught to see multiple sides and integrate different points of view. “Typically in law, there are clear winners and losers,” says Pinkham. “In business we learn that sometimes we have to give up small losses in order to gain more collaboration and a better impact on the bottom line down the road.”

In addition to CEO hiring committees looking for the right match, Pinkham’s research is important to managers who want to broaden their experience. “When you’re developing your career, it may be a good idea to look at different functional backgrounds,” he says. “For example, having more exposure to the legal team may help you develop a better sense of the legal environment.”

As a business educator, Pinkham tries to bring the legal environment into the classroom. “We know from the research that an exposure to law and a legal vocabulary helps business people anticipate regulation and do better in negotiations,” he says. “If we could improve how we integrate law and business maybe we would see a convergence between JDs and MBAs, rather than a stark contrast.”

With more and more leaders getting advanced degrees, CEOs are better educated that they were in the past. “When future leaders come out of an academic program, that education and experience become theirs,” says Pinkham. “It’s important to understand how that shapes the decisions they make as they start leading firms.” 

 

Previous issues of impact