As your business grows larger and more diverse expertise is needed to migrate your way through complex world of business, you may start to look outside your organization for people to sit on your board. That's a brilliant idea - if you're thinking along those lines then congratulations! You're well on your way beyond the 'entrepreneurial myth' problem. You need to wear fewer hats and let others provide input and advice and make decisions. So there are occasions where it might be appropriate to consider in-house legal counsel to sit on the Board of Director as one option to meet that goal. Is that wise?
The supposed benefits of a lawyer participating on a client’s board of directors include being more informed about the client’s business, being able to identify emerging problems and reach better solutions, solidifying the relationship with the client, and having other directors give weight to your opinion because the lawyer shares their liability as a director. The board of directors get the benefit of legal insight in the decision-making process.
Rather than fostering confidence between lawyer and client, sitting on the client’s board often leads to waivers of client confidentiality, conflicts of interest, exposure to increased risk of liability for the corporation and the board, and questions about insurance coverage.
CONFIDENTIALITY AND PRIVILEGE: In the typical board meeting setting, it’s just about impossible for a lawyer-director to separate business judgements from legal advice and make that separation clear to other board members. This confusion of roles may result in an inadvertent waiver of client confidentiality. For instance, legal advice may end up in the minutes of the board’s meetings, or the lawyer as client-director may waive the solicitor client privilege that belongs to the board.
CONFLICT OF INTEREST: The lawyer-director role can give rise to conflicts of interest or compromised professional independence. For example, the lawyer may be called upon to participate in board decisions that would affect the amount of work or fees going to the law firm. Or the lawyer’s fiduciary duty to shareholders as a director conflicts with his fiduciary duty as a lawyer to the corporation and its ‘acting minds’. Directors can be called upon to be witnesses in litigation proceedings. And so can the lawyer-director. Which may not be good at all . . . .again, solicitor client privilege can be impacted. And if called as a witness, that lawyer cannot also act as the corporation’s legal counsel.
LIABILITY: And from the lawyer’s perspective, the lawyer who sits on a client’s board has an increased risk of liability. Lawyer-directors are held to a higher standard of care than either a non lawyer director or a lawyer who is not on the board. And, should a claim arise, the lawyer might find that he does not have insurance coverage; neither as a lawyer (exclusion in the professional liability policy for acts done as a director) or as a Director (the directors and officers policy may limit coverage to acts done solely in the insured’s capacity as a director).
SolutionThe benefits of sitting on a client’s board of directors can be achieved without incurring the serious risks inherent in the dual role. The lawyer can participate at board meetings - but just do so as the Corporation’s lawyer. That is, a lawyer can offer to attend board meetings and receive all information distributed to board members but only in his or her capacity as solicitor rather than director. So the lawyer can provide value as an advisor rather than decision maker.
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