Introduction

Corporate lawyers often handle significant cases and lucrative deals for high-profile corporate clients. These lawyers through representation often become familiar with the company and are trusted advisors. Often corporate clients ask their lawyers to serve on the company’s board of directors.[1] The number of lawyers sitting on corporate boards has risen significantly in the past few decades, specifically “the percentage of firms with lawyers on the board has risen substantially – from 24.5% in 2000 to 43.9% in 2009.”[2] When sitting as a director,  a lawyer often differs from their fellow fiduciaries. While they often possess greater knowledge and awareness of fiduciary duties and securities obligations, lawyers who simultaneously serve as a board director and corporate counsel to a company remain bound to their ethical obligations under their state bar. While not categorically banned by the ABA, this dual-role as both director and counsel requires careful consideration of somewhat competing interests.[3] Proponents of the dual-position argue that “[t]he benefits of lawyer-directors in today’s world significantly outweigh the costs.”[4] Others who are opposed of the director-counsel role often argue for a per se ethical rule against the dual-position.[5] Considering the debate on this topic, there is little consensus regarding whether it is worth it to have a lawyer serving in both roles. This blog will address the advantages and disadvantages of the dual-position and the ultimate question of whether it is worth it.

Do Lawyers Make Better Board Members?

The lawyer-director dual-role raises multiple types of ethical concerns. First, conflicts of interest may “caus[e] reasonable parties to question the lawyer’s professional independence and sometimes requir[e] the lawyer-director to decline representation in a matter or resign as a director.”[6] Second, there is the potential for confusion among the lawyer themselves and company executives on “whether the lawyer’s views on a matter are legal advice…expressed as the business or practical suggestions of a board member.”[7] Third, further ethical implications arise with the need to “protec[t] the confidentiality of client information, especially protecting the attorney-client privilege.”[8]

It is only after the lawyer has informed the corporate client of these ethical concerns and concluded that they themselves can accept the position without a present disqualifying conflict or ethical limitation that they may accept a lawyer-director dual-position.[9] Making this determination itself requires a delicate balance of competing interests. The interest in retaining the position as a director can become a disqualifiable conflict for the lawyer, especially if they are incurring liability as a director.

As both counsel to a corporate client and a director, the attorney is subject to all the ethical rules for all lawyers and the fiduciary duties for all directors. In ABA Formal Opinion 98-410, the ABA offers several recommendations for navigating these concerns, such as a providing a written memorandum detailing the implications of the dual-role and ensuring the lawyer’s honesty about whether their advice is legal or business.[10] The lawyer in this dual-role has the duty to ensure other board members understand the nature of their role as director and counsel.[11] The duty to keep fellow directors apprised of the implications can be difficult. When serving as both director and counsel, the attorney must “make clear to the client at all times ‘which hat she is wearing.’”[12] The counsel hat is worn when providing legal advice to the board, whereas the director hat is worn when providing business related or other non-legal advice to the board members. Drawing the line between the differing types of advice every time a lawyer provides insight to their fellow board members can present difficulties. Advice may not always be solely legal or solely business and may blur between the two. However, the burden is on the lawyer to decipher between the nature of advice and ensure the awareness of their fellow board members.

Why Lawyers Make Good Board Members

Lawyers are often described as risk-adverse, making entire careers of how to advise clients to stay out of liability. Businessmen, however, are often praised for taking risks, and especially the ability to sense the right risks to take. Naturally, the risk-adverse nature of lawyers may seem incompatible with the business side of the director seat. For the lawyer, serving on a corporate board provides the opportunity to network and gain other corporate clients, alongside the benefit of earning annual directors’ fees.[13] Nevertheless, the lawyer-director dual-role often results in benefits to the company in the form of more in-depth legal advice and having a director who is more informed of their legal duties.[14]

The Cornell Lawyer-Director Study in February of 2013 published evidence suggesting there is quantitative support that lawyers make better board members.[15] Generally, “a lawyer-director increases firm value by 9.5%, an increase that rises to 10.2% when the lawyer-director is also a corporate officer.”[16] Also the Cornell study found an increase in shareholder value was also accompanied by positives in executive compensation, risk management, litigation management, board structure, and takeover protections.[17] Specifically the study found there was “[b]etter alignment between executive and shareholder interests.”[18] This included stock options backdating litigation dropping almost 94 percent and positive “patent litigation on firm value increase[ing] by 13.2 percent.”[19] There was also decreases in various types of bankruptcy risk litigation.[20] Boards with a counsel-director often had increased likelihoods of board sizes and a classified board.[21] A larger board provides more directors to consider business decisions and solve issues, and a classified board provides more stability and helps build a board of directors with institutional knowledge.

For the lawyer, the dual position has significant advantages. Typically, the legal fees paid by the client go to the firm directly and only come to the lawyer indirectly by salary of fee sharing. The directors’ fees however provide a substantial financial benefit which goes straight to the counsel-director. Moreover, the networking opportunities and company interactions provide the lawyer occasions for career growth and access to more high-profile clients.

The Downsides of the Counsel-Director Role

Despite the benefits of the dual-role as director to the company and the lawyer, the position comes with some downsides. A lawyer who does not navigate the ethical line of their position’s competing interests will end up in trouble with the state bar association.

Lawyers serving as both counsel and director may not be considered independent for purposes of conflicts of interest.[22] Especially on smaller boards, a director who is not considered independent could greatly affect the outcome of shareholder derivative actions. Comradery between fellow directors can often be beneficial for those running a corporation, however, the understanding that what a director tells the counsel-director could be used to their disadvantage could cause a decreased level of trust between other directors and the counsel-director. Additionally, lawyers in the dual lawyer-director role may also need to be cautious of securities laws, as they “could be construed to make them a control person under Section 20(a) of the Securities Exchange Act of 1934, as amended,” which can expose a lawyer to additional liability for violations of the securities laws.[23]

Issues may also arise between a lawyer and their fellow directors due to their responsibilities. The lawyer’s role as counsel is representation of the company and not the directors unless otherwise retained.[24] Also, for the company, Director and Officer (D&O) insurance may increase with a lawyer-director on the board. Because lawyers serving as both director and counsel for a corporation have increased potential liabilities, insurers are more reluctant to extend Director and Officer insurance to companies with lawyers on their board. Lawyers face greater risks than non-lawyers when becoming directors, so D&O insurers may discourage lawyers from taking board positions or raise premiums for the company.[25]

Is it worth it?

The million-dollar question at the end of this debate: is it worth it? The answer to this question is probably the most well-known lawyer phrase: it depends. It depends on whom you are asking and what they have at stake. This cost benefit analysis is specific for everyone involved, whether it is the company, the lawyer, the shareholders, or the law firm.

Is it worth it for a lawyer to gain an additional source of income as a board member and networking opportunities but also incur additional liability and the immense responsibility to comply with ethical rules? Is it worth it for shareholders to gain a director with additional insight into legal responsibilities and the company but also gain potentially substantial risks like higher D&O insurance premiums? These are the kinds of questions that go into the decision making for a lawyer to accept a board position and for a company and its shareholders to extend such an offer.

Overall, the benefits of a lawyer serving on a corporate board are significant, given their specialized knowledge of fiduciary duties and awareness of legal obligations. The major drawbacks are typical burdens held by the lawyer-director themself, since they are the one bound to the ethical rules and legal implications. For a company and its shareholders, the benefits likely outweigh the costs of any additional Director and Officer insurance premium. For the lawyer, however, the lawyer-director role is not a simple one. The lawyer-director must maintain a constant awareness of whether they are providing legal or business advice and ensure that it is well communicated. The lawyer-director role further requires a constant understanding of whether inherent conflicts hinder the lawyer from performing their obligations in the position of both counselor and director. Nonetheless, corporate director positions offer additional sources of income for lawyer-directors and provide incomparable networking and business opportunities. For a lawyer considering the dual lawyer-director role for a corporation, the position is worthy of consideration. The choice comes down to whether it is worth it for that specific lawyer, the company, and the additional incentives.

 

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[1]  ABA Comm. on Ethics & Pro. Resp., Formal Op. 98-410 (1998).

[2] Lubomir P. Litov, Simone M. Sepe, & Charles K. Whitehead, Lawyers and Fools: Lawyer-Directors in Public Corporations, 102 Geo. J. Legal Ethics 413, 427 (2014).

[3]  ABA Comm. on Ethics & Pro. Resp., Formal Op. 98-410 (1998).

[4]  Lubomir, supra note 2 at 413.

[5] Sabrina Elliott, Note, The Ethical Landmines of Dual Service: United States v. Holmes, 35 Geo. J. Legal Ethics 669, 674 (2022).

[6]  ABA Comm. on Ethics & Pro. Resp., Formal Op. 98-410 (1998).

[7]  Id.

[8]  Id.

[9]  Id.

[10]  Id.

[11]  Id.

[12]  D.C., Bar, Op. 382 (2021).

[13]  Ronald C. Minkoff, Should Lawyers Serve as Corporate Directors?, N.Y. Legal Ethics Rep., Jan. 15, 2022, https://www.newyorklegalethics.com/should-lawyers-serve-as-corporate-directors/.

[14]  Elliott, supra note 5, at 673-74.

[15]  John Okray, Lawyers As Corporate Board Members: Corporate Type, The Federal Lawyer, May 2013, https://www.fedbar.org/wp-content/uploads/2019/12/corporate-type-may13-pdf.pdf.

[16]  Lubomir, supra note 2, at 471.

[17]  Okray, supra note 15.

[18]  Id.

[19]  Id.

[20]  Id.

[21]  Id.

[22]  Elliot, supra note 5, at 674.

[23]  Okray, supra note 15.

[24]  Elliot, supra note 5, at 671-72.

[25]  Lubomir, supra note 2, at 473.