Professor Stephen Bainbridge, a corporate law scholar often cited in Delaware decisions, has written an article entitled: “Corporate Lawyers as Gatekeeper”, which was excerpted from his book titled: Corporate Governance After the Financial Crisis (Oxford University Press 2012). The article is available on SSRN here. The abstract provides as follows:
Abstract: Corporate lawyers traditionally viewed themselves — and were viewed by the managers who hired them — as advocates, confidents, and advisors, not as gatekeepers like auditors.
In fact, however, lawyers often play a reputational intermediary role not dissimilar to that of an auditor. A very high profile general counsel or law firm partner, for example, can give a client in trouble the benefit of the lawyer’s reputation for probity and upstanding ethics.
Usually, of course, counsel play a more behind the scenes role, but it is still a gatekeeping role. Specifically, transactional counsel and in-house lawyers are well positioned to intervene by blocking the effectiveness of a defective registration statement or prevent the consummation of a transaction, to cite but two examples. In many recent financial crises, however, lawyers all too often failed to be effective gatekeepers. In the Sarbanes-Oxley Act of 2002 (SOX), Congress directed the Securities and Exchange Commission to adopt rules of ethics governing lawyers who appear or practice before the Commission.
As adopted, the post-SOX rules give lawyers what purports to be a very “simple” up-the-ladder reporting obligation. As one proponent explained counsel’s duty: “You report the violation [to top managemkent]. If the violation isn’t addressed properly, then you go to the board of directors].”
Despite SOX’s many strictures in this and other areas, however, a new and even more devastating financial crisis came in 2008 when the subprime mortgage market’s troubles nearly brought the entire banking system to its knees. Once again, questions are being asked about the role lawyers played in this crisis. A reassessment of SOX’s legal ethics rules thus is in order.
This essay is adapted with permission from the author’s book Corporate Governance After the Financial Crisis (Oxford University Press 2012). The first decade of the new millennium was bookended by two major economic crises. The bursting of the dotcom bubble and the extended bear market of 2000 to 2002 prompted Congress to pass the Sarbanes-Oxley Act, which was directed at core aspects of corporate governance. At the end of the decade came the bursting of the housing bubble, followed by a severe credit crunch, and the worst economic downturn in decades. In response, Congress passed the Dodd-Frank Act, which changed vast swathes of financial regulation. Among these changes were a number of significant corporate governance reforms.
Corporate Governance After the Financial Crisis asks two questions about these changes. First, are they a good idea that will improve corporate governance? Second, what do they tell us about the relative merits of the federal government and the states as sources of corporate governance regulation? Traditionally, corporate law was the province of the states. Today, however, the federal government is increasingly engaged in corporate governance regulation. The changes examined in this work provide a series of case studies in which to explore the question of whether federalization will lead to better outcomes. The author analyzes these changes in the context of corporate governance, executive compensation, corporate fraud and disclosure, shareholder activism, corporate democracy, and declining US capital market competitiveness.
Postscript: For those interested in learning about the daily routine of one of the more prolific corporate law professors in academia (or envious about how he does it), the good professor provides a “day in the life” description here, for one of his recent days, which includes his work on finalizing the article linked above. Yours truly is thrilled that the professor’s diary entries for the foregoing day include a reference to reading this blog’s annual review of cases published earlier this week.
Supplement: Perhaps as a companion piece after reading the above article, consider the posthumously published article by the late Professor Larry Ribstein, entitled: “Delawyering the Corporation“, available on SSRN here.