The Risk Manager, Spring 1998
Kentucky’s Rules of Professional Conduct do not preclude lawyers with corporate clients from sitting on the client’s board of directors, but the ethical concerns of doing so are stressed in Comment 13 to Rule 1.7 Conflict of Interest. Many think the rules should forbid it. Similarly, risk managers discourage lawyer-directors. The arguments against being a lawyer-director are loss of independent professional judgement, inherent conflicts of interest, potential loss of the attorney-client privilege, increased risk of becoming a fact witness, risk of disqualification of lawyer and firm, increased risk of a malpractice claim, and vicarious liability exposure of the lawyer-director’s firm.
The ABA until now has taken essentially a neutral position on the ethics of board membership by lawyers. In Formal Opinion 98-410 (2/2/98) The ABA Standing Committee on Ethics and Professional Responsibility has come off the fence. Key points in the opinion are:
- It is not per se unethical for a lawyer to sit on the board of a corporation that the lawyer or the lawyer’s firm serves as legal counsel.
- The primary ethical concerns are conflicts of interest and waiver of the attorney-client privilege.
- Four conflict situations are identified: the lawyer-director opposes a board action and is later asked to represent the corporation on it; the lawyer is asked for legal advice on a board action in which the lawyer participated; participation in board consideration of hiring or firing legal counsel; when the directors are sued and the lawyer-director’s firm is to provide defense counsel.
- The lawyer-director should make full disclosure of these risks to the corporate client and get the organization client’s consent, preferably in writing.
The Committee offered these guidelines for lawyer-directors:
- Assure that the board and management appreciates the different responsibilities of director and legal advisor, understands that the corporation is the client and not its constituents, and that conflicts of interest could cause the lawyer’s recusal in one or both capacities.
- Explain the attorney-client privilege considerations attendant to counsel serving as director.
- The lawyer-director should not participate when the board is considering the corporation’s relationship with the lawyer or the lawyer’s firm.
- Maintain independent professional judgment, especially in the face of board preferred courses of action that as counsel the lawyer-director finds legally objectionable.
- Pursue diligently as counsel legally sufficient decisions of the board to which the lawyer-director was opposed.
- Refuse to act as counsel in any matter that conflicts with the lawyer-director’s actions as director.
This opinion is a must read for lawyers serving as directors. The ABA/BNA Lawyer’s Manual On Professional Conduct covers it well in Vol. 14, NO. 4, page 105, 3/18/98.