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News

Law Office Management

Jun. 2, 2015

The Benefits for In-House Counsel of Serving on Other Companies' Boards

Opportunities abound for attorneys and businesses when in-house counsel serve on corporate boards of other for-profit companies.

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.

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Donna Mallard

Daily Journal Staff Writer

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