It’s common for lawyers to serve both sides advising on different legal matters. Worse would be to see lawyers from the same Firm advice both parties in the same case. Should lawyers who act for management also advise the board of directors? Should lawyers who represent the shareholder also advice management? Should a lawyer who is also a director of the company provide legal advice on management and operational matters to the same company?
Over the past decade, regulators have been forced to ensure that auditors are independent when they’re external auditors for companies. Post Enron, the Sarbanes-Oxley Act was issued in the United States to, increase the independence of external auditors. After the financial crisis of 2008, the Dodd-Frank Act ensured that compensation consultants were hired by the board’s compensation committee and not hired by or unduly influenced by the CEO or other management. Governance pundits copy all sorts of rules to impose rules on the auditors. Needless to say that most of them may belong to the legal profession. But, why not they look in the mirror, whilst implementing these magnificent independence requirements?
Lawyers are equally important in the field of corporate governance. They interpret and apply legislation and offer advice to—shareholders, directors, managers and even auditors—who have interdependent and sometimes conflicting interests or views. But if the above reasoning is correct, so far as auditors and compensation consultants are concerned, then strict independence should apply to lawyers, as well. When there’s a dispute between management and shareholders, it’s important for boards to have their own set of lawyers who are independent from management and seen as objective and willing to act in the interest of directors /shareholders and not management. Shareholders suffer when the board retains advisors who are under obligation to management.
When advising both sides, lawyers and firms typically make more money from management than the board. The resulting bias might lead to lawyers drafting protection mechanisms for management such as golden hand-shakes, poison pills, dual-class shares, restrictions on meetings and voting, and then resist pro-shareholder governance reforms.
Normally, if you do your job properly as an auditor, you may make recommendations or report non compliances that management will not like. That’s okay, because you’re not acting on behalf of management. However, lawyers are able to play on both sides and give different views and still survive! This needs to change. Lawyers much like auditors should act for shareholders or management. You cannot serve both sides and fulfill your fiduciary duties to only one.