Coffee, J. 2006. Gatekeepers: the Professions and Corporate Governance. Oxford: Oxford University Press.
Joan Loughrey, Corporate Lawyers and Corporate Governance, Cambridge University Press, Cambridge and New York, 2011, Hardback, xxxiii + 350 pp, £85.00; US$140.00, ISBN 978-0-521-76255-7
Article first published online: 3 JAN 2013
© 2013 Blackwell Publishing Ltd
Corporate Governance: An International Review
Volume 21, Issue 1, pages 116–117, January 2013
How to Cite
Chambers, A. (2013), Joan Loughrey, Corporate Lawyers and Corporate Governance, Cambridge University Press, Cambridge and New York, 2011, Hardback, xxxiii + 350 pp, £85.00; US$140.00, ISBN 978-0-521-76255-7. Corporate Governance: An International Review, 21: 116–117. doi: 10.1111/j.1467-8683.2012.00931.x
- Issue published online: 3 JAN 2013
- Article first published online: 3 JAN 2013
Joan Loughrey has crafted this meticulously. Her subject is both important and controversial yet her treatment of it is impressively restrained and devoid of polemics. Her extensive footnotes and bibliography source her discussion well – much more thoroughly than is typical – making this an ideal reference book for serious practitioners, regulators, academics, and students.
Her broad thrust is to invite us to challenge some of the values of the legal profession in the context of the services many of its members give to corporations. Coffee, whom she cites extensively, pointed out in 2006 that his so-called “gatekeepers” – the professional agents of the board and of the shareholders – had been ineffective at preventing corporate debacles such as Enron.1 His gatekeepers were auditors, attorneys, securities analysts, credit-rating agencies, investment advisors, and proxy advisors.
Loughrey looks in depth at the role of just the lawyers. Of course, she does so post the 2007–8 global financial crisis though prior to the emerging 2012 crisis. While she supports her thesis predominantly by referencing UK cases and UK law, she also relates her arguments to the international situation – especially in the US, Canada, and Australia. Indeed, many of her UK cases have an international dimension – as with the New York law firm Davis Polk Wardell's report to Shell's audit committee on the overstatement of oil reserves scandal which led to the departure of Shell's CEO and CFO. She has a chapter devoted to the international perspective. The threads she weaves travel well and can be applied widely.
A caricature of a “professional” accountant might be summed up in the answer to the question “What does two plus two add up to?” – to which the answer is likely to be “What do you wish it to add up to?” Loughrey implies a similarly unprincipled caricature of the lawyer who prioritizes finding a way to give the client the desired rather than the correct result.
She draws attention to a professional culture that fails to stress independence from the client, and points out that corporate lawyers in the US, Canada, and Australia have all become embroiled in scandal as a result of failing to respond as their societies expected. In effect, she is attributing an “expectations gap” to the legal profession which was first associated by Liggio with the accounting profession.2 She discusses how lawyers should respond when corporate agents (such as management) provide instructions contrary to the company client's interests. Agency theory tells us that management are the agents of the owners whose company it is, with the board “holding the ring” between these two parties. She discusses the common failure to properly identify the client especially by lawyers acting for owner-managed companies, and therefore running the risk of oppressing minority shareholders. There are striking parallels with auditors who tend to presume their client is management when their report is addressed to the shareholders.
Professionals working for organizations will often be conflicted between what is the right professional act and what is the right administrative act – even more so if the professional is an employee of the organization rather that providing the service from the vantage point of belonging to an independent practice with many clients. Loughrey refers to the commercial orientation of the big firms and how commitment to client service must be balanced by a commitment to public service. She quotes the Smedley Review3 which states that it is far from inconceivable that “a law firm will, in the future, be regarded as having contributed to a major business collapse” because of “getting too close to the client to enable objective advice, and of chasing profits at the expense of maintaining proper professional standards.”
The privileges of an occupational group to whom society gives professional status may include monopoly rights to practice and an obligation for the client to take the service (such as an annual audit). These and other privileges are only appropriate if the occupational group puts the ideal of service above the pursuit of profit maximization. Indeed, one of the UK prerequisites for an occupational group to be given a Royal Charter by the Privy Council is assurance that acting in the public interest comes first. Loughrey points out that “the public interest” has been disingenuously redefined by the UK legal profession as merely to do with protecting the interests of their business clients rather than the wider public interest. She discusses lawyers acting as “zealous advocates” and the concept of “creative compliance.” She debates whether (1) lawyers should more frequently assume the roles of gatekeepers, moral counselors, reputational intermediaries and even whistleblowers, (2) when it is legitimate for lawyers to prioritize the wider public interest over their clients' interests, and (3) whether unethical behavior and advice by a lawyer is legitimate when it is not illegal.
There are many parallels between the legal and the audit profession. Coffee referred to the legal profession as being an oligopoly. In the UK, 99 of the FTSE 100 and 240 of the FTSE 250 are audited by a Big 4 firm. Perhaps the “magic circle” law firms are not so dominant globally, as there is less global standardization of law than of financial reporting and auditing. The audit profession is currently subject to an investigation by the UK Competition Commission and there is an EC White Paper and draft audit regulation designed to address the lack of competition and its negative consequences. Loughrey ponders whether the apparent bargain between state and profession which allows lawyers not to perform a public interest function, is possibly so as not to jeopardize the competitive position of English law firms. Currently the large accounting firms are lobbying furiously to resist measures which would threaten their business model.
Loughrey points out that the view in the UK has been to look to auditors, not lawyers, to improve corporate governance. The House of Lords Inquiry that led to the referral to the Competition Commission concluded that the auditors failed in the lead up to the global financial crisis.
Loughrey's orientation is to explore the role of the lawyer in providing advice to corporations. She is not specifically focusing on the role of the company secretary (a UK phenomenon) who services the board as the corporate governance conscience of the company, especially with respect to the UK Corporate Governance Code which the Financial Reporting Council describes as “soft law” having a “comply or explain” status only. Arguably the company secretary should be resourced out of the budget of the independent chair of the board, so as to bolster his or her independence from management.
Loughrey has been effective at demonstrating the self-serving alliance between corporate lawyers and company management, to the detriment of the wider public interest. The parallels with the auditing profession are indeed stark. Of even greater concern is the alliance between lawyers and auditors to preserve or enhance this status quo. An example is where lawyers advise auditors on “creative compliance” to enhance the financial rewards of accounting firms. A related issue is that of regulatory capture where the regulator, one way or another, has been captured by the profession being regulated. An extension of this is the misleading perception of regulator independence by placing on regulatory boards members of the other profession who are conflicted because of their client relationships.
Liggio, C. D. 1974. The expectation gap: The accountant's legal Waterloo. Journal of Contemporary Business, 3(3): 27–44. Audit expectations gap: “A factor of the levels of expected performance as envisioned both by the independent accountants and by the user of financial statements. The difference between these levels of expected performance is the expectation gap.”
Smedley, N. 2009. Review of the Regulation of Corporate Legal Work, March.