Keeping good company

A report by financier Derek Higgs will make it harder for solicitors in private practice to join the boards of client companies.

Yet, as Michael Gerrard reports, those working in-house are being viewed as ideal non-executive directors for businesses

Solicitors could soon find it more difficult to serve as non-executive directors (NEDs) of client companies if the findings of a recently published government-sponsored review are implemented.

Financier Derek Higgs published his report - Review of the role and effectiveness of non-executive directors - in January and received a warm reception from the government (see [2003] Gazette, 23 January, 5).

Its recommendations will be incorporated into the Financial Reporting Council's (FRC) combined code by July.

The FRC is a quango overseeing financial reporting, while its code concerns best practice in corporate governance.

Mr Higgs was commissioned after the fall-out from the crash of Enron and WorldCom last year amid talk of boardroom skulduggery.

To avoid the questions that dogged that company's board, Mr Higgs pushes the concept of independent NEDs and a definition of 'independence'.

Under the guidelines, independent non-executive directors cannot - among other things - have had a material direct or indirect business relationship with that company in the previous three years.

It also stipulates that half a company's board must consist of independent NEDs, as opposed to the current situation where a third will suffice.

On the face of it, this would obviously reduce the prospects for solicitors already engaged by clients.

Leading City figure Vanni Treves, the former senior partner and now a consultant at Macfarlanes, is a fan of the proposals and sees them as an opportunity to open up boardrooms, where at the moment - whether solicitors or not - the same faces predominate.

He says: 'The first thing that Higgs wishes to do is to widen and extend the NED gene pool.

I know a great many of them and they tend to be recruited from the ranks of the usual suspects.'

Mr Treves himself sits as a non-executive chairman of troubled insurance group Equitable Life, Channel 4 Television, and the London Business School (LBS).

As part of the campaign to widen this 'gene pool', Mr Treves's LBS colleague, Professor Laura Tyson0, is in charge of a government committee that aims to recruit up to 100 people from the non-commercial sector to become NEDs.

Mr Treves argues that solicitors would make excellent recruits to this new wave.

He says: 'I think it is the particular knowledge that solicitors acquire over the years, and the broad legal and commercial expertise they deal with in their everyday lives, that makes them an asset in the boardroom.'

But Mr Treves maintains that the Higgs report effectively puts a halt on private practice solicitors joining the boards of client companies.

He says: 'There will be a risk of conflicts of interest, particularly in a situation where the law firm makes a mistake.'

He adds that there have always been question marks over insurance and whether or not a law firm would be viewed as liable for the negligent acts of a partner serving as a director.

Mr Treves says that even before Higgs, many large City firms discouraged their partners from becoming NEDs, as such a position might provoke talk of conflicts that could prohibit the firm from acting in the future for a rival company in the same field.

For Mr Treves, the answer to this conundrum is to encourage in-house solicitors from commerce and industry to serve as NEDs on the boards of non-rival companies.

He argues that they do not suffer from the same conflict hazards, but boast the necessary experience - both legal and commercial - to benefit a boardroom.

He says: 'It affords them the ability to escape the intellectual claustrophobia of their own companies, allowing them to return to their main employer refreshed and with a new perspective of how work is done elsewhere.'

This argument naturally finds favour with Ann Page, head of legal at the Co-operative Bank and chairwoman of the Law Society's Commerce and Industry Group.

She says: 'I would support the view that we have the necessary business and management skills.

Indeed, some employer companies may encourage their general counsel to become NEDs as part of a personal development plan, as well as a way of bringing new ideas back.'

However, she adds that time could be an issue, given the packed schedules of solicitors working in commerce and industry.

A raft of post-Enron corporate governance measures, of which the Higgs report is but one, has increased this workload.

It is an issue that impinges strongly on the day-to-day activities of the in-house lawyer, especially in the cases of those who also fill the company secretarial post, which the report imbues with new powers and responsibilities to the board.

At the same time, Higgs could be bad news for in-house lawyers at their own companies.

The requirement for a 50/50 split between executive and non-executive directors may make it even harder than it already is for lawyers to take the step up to the board as there will be less space for promotions.

Ms Page concedes that the new rules will be 'another complexity when you are a chairman looking at the make-up of your board', but she says it depends on whether the company wants business-people or specialists on the board.

One way round any problems, she suggests, would be to have an executive team under the board that has management power.

The role of the board would change to challenge, rather than formulate, policy.

Of course, some in-house lawyers simply want to get onto the board, whether it be for the prestige, influence or with an eye to their own future prospects, but Ms Page argues: 'If you are influencing the company and making a difference, I would say that titles are less important.'

Back in private practice, not everyone shares Mr Treves's enthusiasm for the Higgs report, with many arguing that it is heavy-handed in its attitude to solicitor directors.

Peter McCormick, of the eponymous Leeds firm, was until August 1998 a high-profile NED at Leeds United Football Club, a client of his.

But he argues that conflict need not automatically arise if things are handled properly.

He says: 'Why is it a conflict for a solicitor to do legal work for a company where he sits on the board as long as he doesn't cross the line and promote his own wellbeing instead of that company's? We are being regulated out of existence.'

He adds that as professionals aware of their responsibilities, solicitors would be alive to potential conflicts and walk away if any were found.

Others cling to the concept of materiality - in other words, asking yourself whether the amount of work undertaken either by yourself or your firm is so minor as not to cause concern.

Support for this argument comes from Michael Cassidy, a senior property partner at City firm DJ Freeman, who came in for criticism last year for his role as an NED at British Land, while at former firm Maxwell Batley.

Some shareholders opposed his reappointment, claiming he lacked necessary independence.

Mr Cassidy remains a director of both British Land and SG Warburg, and a determined supporter of lawyers in boardrooms.

He argues: 'A solicitor can continue in the role of director, so long as that partner's work is not material.'

Steven Durno, the secretary of the Law Society's company law committee, confirms that there are already guidelines and rules on independence and conflicts, which do not prevent solicitors from being NEDs, provided they act with care.

However, he says the proposals add further complications.

He says: 'Post-Higgs, it is going to be much more difficult for solicitors in that role, because it is going to be hard to divide up the functions they fulfil as independent directors or as solicitors.'

Mr Durno adds that the Higgs report is unique as a set of rules in that it is not pushing change through statute, but if it gets incorporated in the FRC code, companies will be required to comply or explain their reasons for keeping a controversial appointee on the board.

He says: 'The only way any company will be tried is in the court of public opinion, such as through embarrassment at an annual general meeting.'

But after the spate of US scandals such as WorldCom that triggered the Higgs report, there may not be many solicitors keen to brave that at the moment.

Michael Gerrard is a freelance journalist