As a general counsel, I often see non-lawyer executive colleagues serving on the boards
of outside companies. When I ask CEOs, board members, or recruiters why they don't
look for more lawyers to serve on their boards, they're often skeptical: "Why would
we ever do that?" they ask. "You're too conservative, you think like a lawyer, and
you don't really know anything about business."
And, of course, most professionals advise in-house counsel not even to think about
serving on their own company's board.
Such a dual legal and board role is fraught with conflicts, especially when in-house
counsel must choose between their primary responsibilities and their role as board
members. So in-house counsel have traditionally settled for spots on the boards of
nonprofit organizations.
But my research reveals a growing trend since 2000 of in-house counsel serving on
the boards of
other companies. Two years ago, I discussed this topic at an event I organized bringing
together the San Diego Chapter of the Association of Corporate Counsel and the Corporate
Directors Forum. Three experts participated: a partner with a large international
firm whose background is in corporate governance, the general counsel of a public
company who serves on the board of another public company, and a non-lawyer member
of one of those boards.
Here's what I learned: Some public companies seek out board members who are in-house
at other companies because of the special experience they have in various areas of
law, regulation, and litigation. Companies in highly regulated industries such as
securities, banking, telecommunications, or health care often seek lawyers to join
their boards, especially when they are involved in ongoing compliance matters. And
companies that are expanding their international trade and operations may need help
monitoring compliance with the U.S. Foreign Corrupt Practices Act and similar laws
in foreign jurisdictions.
Serving on another company's board can be very rewarding. First, the remuneration
both in terms of quarterly or annual cash and stock or option payments for service
on a public company's board can be worth tens of thousands, and sometimes hundreds
of thousands of dollars. Second, associating with business executives provides in-house
counsel with the contacts and experience needed to move from legal to more senior
executive roles over time. And third, working with another company in the same industry
can offer insights in-house counsel can take back to assist their own companies from
business and financial perspectives.
Often, lawyer-board members are valued for their independent judgment. And companies
involved in major or continuing litigation may appreciate advice from an in-house
counsel with a great deal of litigation experience who can evaluate legal disputes
and manage the board's related expectations. A lawyer-board member also brings analytical
skills, knowledge of regulations and regulators, and experience managing legal and
business risks.
A lawyer-board member also may be prized for skills specific to an industry or business,
or for leadership experience. Many in-house counsel are part of executive management
teams, and they often have long and invaluable experience developing strategy. Moreover,
in managing diverse teams, in-house lawyers often have honed the abilities to build
consensus, form relationships, and follow through on commitments. Many also have developed
crisis-management skills that can be essential in the board room, and they may have
bachelor's or advanced degrees in science, engineering, or business that provide another
set of skills that boards value.
Research published in 2014 shows that public companies are more likely to have a lawyer-director
if they are: big; especially complex; listed on the New York Stock Exchange; and involved
in a lot of litigation. Authors Lubomir P. Litov, Simone M. Sepe, and Charles K. Whitehead
also found that, on average, lawyer-directors are men 63 years of age who serve on
the boards of two companies, and they belong to three or four committees on each.
Here are a few more lawyer-director factoids from the trio's analysis of data covering
2000 to 2009:
- 25 percent are members of the audit and nominating or corporate governance committees;
- 33 percent are members of the compensation and risk-management committees;
- 7 percent chair the boards they serve on;
- 9 percent chair the audit committees;
- 14 percent chair the compensation and/or risk-management committee; and
- 27 percent chair the nominating committee.
Litov, Sepe and Whitehead - who say their research was the first of its kind - found that
companies with lawyer-board members have statistically higher market value than those
that don't. They're also less likely to run afoul of stock-option back-dating rules
or peg their CEO'S compensation to the company's short-term value.
Ethics rules and state and local bar opinions in this subject area deal primarily
with lawyers who serve both as outside counsel to a company and on its board of directors. In
such cases, a major issue is the potential for self-dealing: using the board seat
to draw business to one's firm. In addition, if an outside lawyer's involvement in
the company becomes conflated with his or her legal work, that may jeopardize the
attorney-client privilege.
There are few if any specific guidelines, however, for an in-house counsel serving
as an independent member of a public or private third party's board. Above all, I
would advise attorney-board members to be clear that they are not the company's lawyer.
Instead, they should let the company's board and management team know they are using
their legal, regulatory, and executive experience to help the board understand and
evaluate legal, regulatory, business, or other issues.
Randy Berholtz is general counsel and secretary at Innovus Pharmaceuticals Inc. in
San Diego and an adjunct professor at the Thomas Jefferson School of Law.
Donna Mallard
Daily Journal Staff Writer
