A Problematic Dual Role: Lawyer & Director
Today on the WSJ Law Blog, Peter Lattman wrote about the trend toward discouraging lawyers from serving on public company board of directors, due to the risk of shareholder suits or SEC investigations. This topic struck a familiar cord with me – it is one I have often discussed with my colleagues. It is also an issue that comes up quite often in legal malpractice litigation. In the past, it was considered a good idea for a lawyer to sit on his or her client’s board of directors. It was considered good business practice. But today the practice is frowned upon because of the pit-falls that can and many times do arise, including, conflicts of interest, loss of independence, loss of attorney-client privilege, disqualification as litigation counsel, risk of firm liability, and loss of insurance coverage.
One of the biggest problems with lawyers sitting on their client’s board is that there just isn’t much guidance on the topic from the ABA’s Model Rules of Professional Conduct. The only general framework comes from Comment 35 to the general rule governing conflict of interest (Rule 1.7) which states:
A lawyer for a corporation or other organization who is also a member of its board of directors should determine whether the responsibilities of the two roles might conflict. The lawyer may be called on to advise the corporation in matters involving actions of the directors. Consideration should be given to the frequency with which such situations arise, the potential intensity of the conflict, the effect of the lawyer’s resignation from the board and the possibility of the corporation’s obtaining legal advice from another lawyer in such situations. If there is material risk that the dual role will compromise the lawyer’s independence and professional judgment, the lawyer should not serve as director.
The rule gives a tremendous amount of discretion to the lawyer to decide whether serving in the dual capacity, as both lawyer and director, could potentially conflict. This leeway has led many firms to ask their lawyers to just forgo making the determination all-together and say “no” to being on a board of directors outright, as the WSJ Law Blog discusses.
The courts have helped in discouraging the practice, as well. One court laid out the dangers quite clearly when it held that lawyer/directors may be so deeply involved in a company that they are required to undertake the strict investigatory duties of an “inside” director whose standard of care approaches that of a “guarantor of accuracy.” See, Feit v. Leasco Data Processing Equip. Corp., 332 F. Supp. 544, 575-76, 578 (E.D.N.Y. 1971). While there has been a decrease in past years of lawyers willing to take on this dual role, it still amazes me how many lawyers believe the benefits outweigh the risks. I think that there will always be a lawyer willing turn a blind eye to the dangers until maybe one day when a rule is adopted that says “A lawyer may not serve on a board of directors of any organization that has retained that lawyer (or his or her firm) to represent the organization in any legal capacity.”
Hat tip to two very insightful articles I was unable to link to:
The Conflicting Roles of Lawyer as Director, Robert P. Cummins and Megyn M. Kelly, Litigation Fall 1996, Volume 23, Number 1, Pgs, 48-52.
Legal Status of the Lawyer-Director: Avoiding Ethical Misconduct, Stephen M. Zaloom, 8 U.Miami Bus. L. Rev. 229 (2000)