Barring Lawyers From the Board
from
July/August 2006
by John R. Engen
Nearly half of 611 companies surveyed last year by the National Association of Corporate Directors had at least one lawyer on their board. But many law firms are reining in their partners’ board service. At Clifford Chance U.S., for instance, attorneys who want to serve as directors must submit a written request to James W. Paul, the firm’s general counsel, outlining, among other things, the levels of indemnification and directors’ and officers’ liability insurance carried by the company in question. After Paul reviews the request, he sends it with his comments to Clifford Chance global headquarters in London, where it must be approved by one of the firm’s two executive partners. Several requests have been denied, says Paul. “It used to be that a partner could just go out and join a board,” he says. “Today we’re being much more circumspect. If the risk factors—including the general level of business risk involved in the industry in which the corporation conducts business—are not reflected in an appropriate level of D&O coverage, we might decline to approve an application.”
The reasons for these clampdowns include the additional time demands on directors stemming from Sarbanes-Oxley requirements. But the chief concern in this touchy regulatory climate is that a law firm might be held liable if a board that includes one of its partners gets caught up in an investigation by the Securities and Exchange Commission or in a shareholder suit. “The assets of the firm will always be more available and significant than any individual lawyer’s,” Paul says. “It’s easy to see how the liability could spread.”
Charles M. Elson, director of the University of Delaware’s corporate governance center, isn’t surprised by those worries. He notes that pension funds and investment banks rarely allow employees to serve on boards, because they could be viewed as extensions of the employing entities—a concept known as deputization. “Plaintiffs will always go for the deepest pockets, which in this case would belong to the firm,” says Elson.
The risks are highest if a partner serves on the board of one of the law firm’s clients. Bernard S. Black, co-director of the Center for Law, Business, and Economics at the University of Texas at Austin, says firms are sometimes named in litigation involving their clients, and Paul is wary of board meetings in which a partner expresses a view as a director on a matter that sparks legal trouble: “Another board member could say, ‘Well, he’s our lawyer, and when he said that, I was pretty sure he was saying [that his firm] said it was okay to pursue that course.’”
Even if the company isn’t a client, law firms are cautious. Bryan Cave requires a partner who wants to join a company’s board to obtain in advance a written statement from the company that the lawyer is acting as an individual, not a representative of the firm. Frank Placenti, a Phoenix, Arizona-based partner and a director of Lipid Sciences Inc., a biotech company in Pleasanton, California, is even more careful. “Every time a legal issue comes up in a meeting, I make it clear that I’m speaking as a businessperson, not a lawyer,” he says.
Morrison & Foerster senior partner Bruce Alan Mann sits on the board of Ceva Inc., a semiconductor design firm with corporate headquarters in San Jose, California. Although Ceva is a Morrison & Foerster client, Mann says he has safeguards to demonstrate that his actions as a director are separate from the firm’s. He is not the billing partner, and he does no Morrison & Foerster law work for Ceva; until recently, in fact, the firm’s advice to Ceva was limited to intellectual-property matters, “an area where I have no expertise at all,” Mann says. “So it’s fairly easy to draw a distinction” between himself and the firm. Richard Koppes, of counsel at Jones Day and former general counsel at the pension fund Calpers, sits on the boards of Apria Healthcare Group Inc. and Valeant Pharmaceuticals International—neither of them Jones Day clients. If a lawyer is serving as an independent director, he says, “you’re not there representing your firm. You’re representing shareholders as a fiduciary.” But many law firms are now clearly unwilling to take the chance that they might have to prove the point.
