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Post-Enron, this much is clear: When it comes to corporate governance, gray areas aren’t good. In the past few months, the Securities and Exchange Commission has called upon the New York Stock Exchange, Nasdaq and the professional organization Financial Executives International to recommend stricter governance standards for officer and director qualifications, among other things. The result has been a flurry of opinions and proposals about shoring up board ethics, structures and procedures. There’s no assurance that lawyers who also serve as directors of client corporations will escape scrutiny. Sitting on a client’s board is a common practice. According to recent SEC proxy statements, partners from 69 of the Am Law 100 firms sit on boards of companies listed on the New York Stock Exchange; 61 of those lawyer-directors’ firms have performed legal services for the companies. But while the practice may be widespread, it’s also risky. The American Bar Association’s Model Rules of Professional Conduct do not bar lawyers from sitting on clients’ boards, but the ABA Standing Committee on Ethics and Professional Responsibility has discouraged the practice in a series of reports, says Lawrence Fox, a former chairman of the committee. Fox, a partner at Philadelphia’s Drinker Biddle & Reath, frames the problem as a conflict of interest: How can a lawyer claim to be an independent director while profiting financially from legal work performed for management? “Ninety percent of the time it all works out fine,” Fox says. “But when everything hits the fan, this is another black eye.” Kenneth Bialkin, a corporate securities partner at New York’s Skadden, Arps, Slate, Meagher & Flom who served on the boards of Citigroup Inc. and several other companies before reaching the boards’ retirement age, has a contrary view. “You’re never totally independent,” he says. “But am I less independent than another director who’s a friend of the CEO? The world is full of conflicts.” Bialkin says that lawyers’ training and integrity make them very good directors. But even he doesn’t suggest that his partners rush out to join corporate boards en masse: “There are dangers,” he acknowledges. At worst, a firm with a partner on the board of a public company could be held liable in shareholder litigation. The hazards lie in the difference between the role of the company’s lawyer and that of an independent director. The lawyer’s allegiance is to the company, not to any single person connected to the company. In contrast, an outside director should be independent from management. Discussions that other directors have with the lawyer-director do not enjoy the attorney-client privilege, and the line between business advice and legal advice can be blurred if a lawyer isn’t used to wearing two hats. In some cases — primarily bankruptcies — a firm can be conflicted out of legal work for a company if one of its partners belongs to the company’s board. That is one reason that New York bankruptcy powerhouse Weil, Gotshal & Manges only rarely allows its partners to serve on boards. “It’s not a blanket rule,” says Richard Davis, a member of the firm’s ethics committee. But partners are required to get the management committee’s approval, which Davis says is rarely given to lawyers in the United States. “It’s generally disfavored,” Davis says. (Since boards are structured differently in Europe, the firm’s restriction on its lawyers there is not as stringent.) Of the dozen big firms surveyed for this article, all said they make decisions about board membership on a case-by-case basis. Weil Gotshal came closest to having a hard-and-fast rule against allowing partners to serve on boards. Of the other firms, New York’s Cadwalader, Wickersham & Taft requires partners who want to join boards to obtain permission from the firm’s management committee. At Dallas’ Akin, Gump, Strauss, Hauer & Feld, membership on the board of a public company is limited to corporations that have a market capitalization of at least $500 million; partners who want to join the boards of such companies must obtain approval from a committee of three partners. At San Francisco’s Pillsbury Winthrop, a partner who wants to accept a board seat must apply in writing for the firm’s permission, and be interviewed by the firm’s professional responsibility committee before receiving approval to join a board. The firm also asks the partner for a certificate of directors and officer’s insurance. If that partner has been working on securities offerings for the client, then a different partner takes over the work. And that’s not the end of the firm’s oversight. Every year partners must fill out a questionnaire to update the status of the relationship with board and client. A staffer tracks the procedure on a centralized database. Not every large firm has such a structured decision-making process. Los Angeles’ Munger, Tolles & Olson, for instance, doesn’t have a formal process like Pillsbury Winthrop’s, but nonetheless reviews each case carefully. “As Enron has so clearly pointed out, it isn’t a free lunch,” says Ronald Olson, a name partner who is a director of Berkshire Hathaway Inc. Lawyer-directors must understand the responsibility and knowledge required for the director’s job, Olson says. Lawyers have been serving on boards since the birth of the American corporation, and the ethical issues have probably been debated since then. In the 1860s George Templeton Strong, a founding partner at Cadwalader, reportedly gave up his share of earnings from a firm client, The Bank for Savings, when he joined its board. It’s not known whether Strong was acting upon his personal code of ethics or that of his firm, but his decision would hardly be common today. (These days, Cadwalader has no formal policy about such fees, according to a spokeswoman for the firm.) In fact, compensation for lawyers from boards is a hot topic. Generally, directors are compensated for their service in equity or with a combination of cash and stock options. At some firms, lawyer-directors are required to share such compensation with the rest of the partnership. Compensation can range from $50,000 at a smaller company to $150,000 at a Fortune 100 company, according to Jan Koors, a consultant at executive compensation firm Pearl Meyer & Partners. In addition, board work takes a lawyer away from billable client matters — sometimes as much as a couple of hundred hours a year. Finally, partners who serve on the boards of public clients are required to disclose fees paid by the client to the lawyer-director’s firm in proxy filings — a prospect that makes some firms uncomfortable. One area where there appears to be consensus, at least at first glance, is audit committee membership. About two years ago the NYSE adopted a rule saying that the audit committee must be made up entirely of independent directors. The rule defines directors who have a business relationship with the company as nonindependent. But there’s a loophole — a big one — that makes it possible for lawyers to serve on the audit committee. The rule allows the board to determine that the lawyer’s relationship does not interfere with his independent judgment as a director. Among the lawyers who have been allowed to join audit committees under the provision are Akin Gump’s Rick Burdick and Dechert’s Barton Winokur. Both lawyers say they know the companies in question very well and have financial expertise that makes their audit committee membership appropriate. Given all the hassle, why do lawyers bother joining boards in the first place? For one thing, says Mark Stevens, a former Fenwick & West partner, serving on a board tends to seal a lawyer’s relationship with a client. For another, outside counsel who fantasize about going in-house often find that sitting on a board is the next best thing, says Stevens, who now spends time serving on boards and is no longer a practicing lawyer. “You learn what it’s like to sit in the hot seat,” Stevens says. “It gives you a taste of business.” “It’s helpful, acting as a principal,” says Akin Gump’s Burdick, who sits on the boards of Fort Lauderdale, Fla.’s AutoNation Inc. and Cleveland’s Century Business Services Inc. Because it provides a front-row view of life on the inside of the company, “it better qualifies me to represent and advise my clients in corporate governance matters,” he says. Burdick stresses that both AutoNation and Century Business Services are relatively small clients and that he doesn’t provide legal advice to either. When a lawyer both sits on the board of a company and provides it with legal advice, he says, “it’s not a very good dynamic.” Given that truth — and the increased attention to corporate governance — it’s possible that fewer lawyers will seek to join clients’ boards, at least for the short term. Says Munger Tolles’ Olson: “Enron was a wake-up call for directorships generally.” Will lawyers sleep through the alarm? RELATED CHART: Wearing Two Hats Find out which of the nation’s 10 highest-grossing firms have current partners who sit on the boards of NYSE-listed clients.

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