Board to Pieces
David Girard-diCarlo, chairman of Blank Rome, was a long-standing director of PNC Bank, a client of his firm. He served on the audit committee and governance committee, among others.
But in 2002, some 10 days after passage of the Sarbanes-Oxley Act, Girard-diCarlo of Philadelphia bid goodbye to corporate board service, even though he calls it some of the “most fun, most stimulating and most provocative times” of his professional life.
Among its provisions, the law increased personal liability for outside directors as part of an overall push toward greater corporate responsibility. It also limited service on certain board committees, such as audit and governance committees, to individuals with no financial ties to the company.
“When Sarbanes-Oxley passed, I said to my clients, ‘I think it is in your best interest, mine and my firm’s that I resign,’ ” he says.
The firm now has a policy that discourages corporate board service. The firm does allow board service on a case by case basis partner Nelson Diaz serves on the board of Exelon Corp., and partner Tom Preston serves on the board of Wilmington Savings Fund Society Financial Corp. But the practice in general is frowned upon, and most partners have “slowly and prudently” rotated off all boards, says Girard-diCarlo.
(The firm does a moderate amount of work for those companies, and Girard-diCarlo acknowledges that there is risk. But, he says, “that risk is mitigated by our partners’ full comprehension of the rules and parameters of Sarbanes-Oxley.” )
Other firms have followed in Blank Rome’s footsteps. Washington, D.C.-based Akin Gump Strauss Hauer & Feld, for one, has a long-standing policy that partners are precluded from serving on for-profit corporate boards without the approval of the firm, says chairman Bruce McLean.
Still, McLean says, overall firm participation on corporate boards has dropped by about 75 percent.
“We want to assure we do not have a conflict of interest or increase our risk profile. We don’t want to encourage shareholder litigation against the client or the firm,” McLean says. As a result, the firm has approved “very few, only a small handful” of directorships in the past five years.
As recently as a decade ago, a board seat was a coveted plum for a senior partner and a mechanism for solidifying a law firm’s relationship with a long-standing client. Now, in the world after Enron and WorldCom, attorneys say board service is fraught with potential liability.
According to Korn/Ferry International, a Los Angeles-based recruitment consultant, as of March, 5.3 percent of board members on Fortune 1000 boards are attorneys. As the call increases for independent directors without financial ties to the company, fewer partners are volunteering for board service and fewer firms are allowing it. Shareholders like the California Public Employees’ Retirement System, the nation’s largest public pension fund, discourage the practice.
So does the ABA’s Standing Committee on Ethics and Professional Responsibility. A comment to Rule 1.7 of the Model Rules of Professional Conduct sets the guidelines: “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 may conflict. … Consideration should be given to the frequency with which such situations may 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.”
Those guidelines, part of Comment 35, were adopted in 2002 in the wake of Sarbanes-Oxley.
‘No longer good for business’
In addition, a board seat would mean a firm is conflicted out of representing the company in the burgeoning cottage industry of internal corporate investigations. In many cases, if a partner serves on a corporate board, his or her law firm is precluded from doing work for the company without notice to the shareholders.
“With all this push for independent board members, a partner has a choice. If he stays on the board, his firm can’t do business with this company. That’s why law firms are asking their partners to leave boards. It’s no longer good for business,” says Mike Ross, former general counsel of Safeway who now teaches corporate governance at the law schools of the University of California at Berkeley and the University of Virginia.
“There’s no way an attorney could qualify as an independent director. And if the firm does no business for them, there’s no reason for the attorney to be a director,” Ross says. Even über board members like Robert S. Strauss, a name partner in Akin Gump, and Vernon E. Jordan Jr., senior counsel to that firm, are trimming their board service significantly, McLean says. Jordan, who sat on 10 corporate boards in 2002 when Sarbanes-Oxley was passed, has whittled his service to just five, according to Forbes.com’s People Tracker.
“We are quite comfortable with [Jordan’s] board memberships,” says McLean. Different firms handle the monitoring of board seats in different ways. Akin Gump, for example, maintains a board membership committee, which includes a slot for the firm’s general counsel. It has the task of vetting each proposed board seat. While he doesn’t sit on the committee, McLean is nevertheless kept aware of each board seat. All directorships are reported to the firm’s malpractice insurance carrier.
At Blank Rome, partners have to sign a document indicating that they are serving on the board as an individual and not as a partner of the firm. Also, the public company must either sign, or at least acknowledge, that document. And none of the partner’s fees as a director come into the firm in any way.
“We’ve always seen the primary issues as real,” says Steve Graham of San Francisco, the head of Orrick Herrington & Sutcliffe’s global corporate practice. “When you have a partner sitting on the board rendering legal advice, the risk is too great that you could have a situation where whatever action the director takes in his capacity as a director might be deemed legal advice,” he adds.
Problems with Privilege
Another concern is the loss of attorney-client privilege. “As a lawyer-director, you leave yourself open to the argument that whatever you are telling the client was not in your capacity as attorney, but in your capacity as director,” Graham says. Orrick Herrington’s policy discouraging board service is strictly enforced. None of its attorneys serve on public boards, Graham says.
General counsel of corporations also increasingly frown on the practice. Some say they might be hamstrung in their ability to manage outside law firms if they report to a firm partner who sits on the board.
Despite that potential “element of awkwardness,” though, lawyers have a great deal to contribute to the management of public companies, says Daniel Cooperman, general counsel and senior vice president of Oracle, the technology corporation based in Redwood Shores, Calif.
“Issues of corporate governance, of board process, of regulatory and legal compliance, are really at the forefront of changes in the role of directors and the role of the board in the governance of the corporation,” Cooperman says. “Those are all areas in which lawyers have a distinct advantage over other businesspeople.”
Because lawyers are more familiar with those issues, they are more patient with the process of fulfilling those requirements than other board members. “And when it comes to special investigations, having a lawyer on the board gives you someone you as general counsel know is going to be understanding, supportive and sympathetic for the need for careful investigation,” he says.
Cooperman adds that the “cleanest way” to secure those skills is to select a lawyer who is not a member of a law firm the corporation hires.
In fact, Oracle fills that need, though not with a corporate lawyer. Joseph A. Grundfest, a professor of law and business at Stanford University who for years ran the Securities Class Action Clearinghouse at Stanford Law School, has sat on Oracle’s board since 2001.
Despite the trend, Cooperman says, “I think lawyers bring a great deal of value to the board.”