| Oregon State Bar Bulletin — AUGUST/SEPTEMBER 2008 |
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The Ethics of Serving on Corporate Boards
By Helen Hierschbiel
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It is increasingly common for lawyers to serve on the boards of directors of for-profit and non-profit corporations. The reasons vary. Some lawyers are interested in expanding their contacts within the community; others are committed to the mission of the organization; still others desire to strengthen a relationship with a client corporation. Both for-profit and non-profit corporations seem to appreciate having lawyers become "partners" in the business and develop a better understanding of the activities of the operation. Particularly with non-profits, there is often an expectation, spoken or unspoken, that the entity will enjoy the benefit of the lawyer’s professional expertise.
Nothing in the rules governing lawyers’ professional conduct precludes simultaneous service as a director and as lawyer for the corporation. OSB Formal Op No 2005-91. Even so, assuming dual roles does present some ethical challenges of which lawyers should be mindful. With care, these issues can be managed.1
Identifying the
Client
Conflicts of interest pose the most common ethical
issues for a lawyer who wishes to represent a client
while serving on its board of directors. A preliminary
issue in analyzing conflicts of interest is identification
of the client. A lawyer who undertakes to represent
an organization represents the organization itself
and not its board members, employees or other individual
constituents. Oregon RPC 1.13; OSB Formal Op No 2005-85.
This can be a difficult concept to hold on to because
the lawyer’s regular dealings are with individual
officers and directors. Nevertheless, the lawyer must
be sure to distinguish the individual representatives
and their interests from the organization and its interests.
The entity itself, not any of its individual officers
or directors, is the client.
The existence of a lawyer-client relationship is not dependent upon the formality of the arrangement, whether there is a written agreement, or the duration of the relationship. A lawyer-client relationship will be found when the would-be client has a reasonable expectation under all of the circumstances that the relationship exists. In re Weidner, 310 Or 757, 770 (1990). The scope of the lawyer-client relationship is similarly dependent upon the client’s reasonable expectations. It is therefore important for the lawyer to be clear about when and for what purpose legal services will be performed.
It is also useful to remember that the ethical obligations of lawyers are not dependent on whether the lawyers are compensated for their services. In other words, a lawyer doing pro bono work has the same ethical obligations as a lawyer who is paid for performing services.
Self-Interest
Conflicts
Lawyers are generally prohibited from representing
a client when there is a substantial risk that the
lawyer’s representation of the client will be
materially limited by the lawyer’s own personal
interest in the matter. Oregon RPC 1.7(a)(2). The representation
is permitted only if the lawyer reasonably believes
that the lawyer can provide competent and diligent
representation and the client consents in writing after
being advised of the risks inherent in the situation.
Oregon RPC 1.7(b). Thus, if the circumstances are such
that there is a significant risk that the lawyer’s
representation of the entity would be materially limited
by the lawyer’s interests as a board member,
the lawyer may not act as counsel with respect to the
matter unless the entity consents after full disclosure.
OSB Formal Op No 2005-91.
A self-interest conflict might arise, for instance, if the organization is contemplating a course of action where the lawyer’s personal support for, or opposition to, the action might make it difficult for the lawyer to provide objective advice about the legal risks of the action. Another example is where the board may be voting on the employment of the lawyer or the lawyer’s firm as corporate legal counsel. Finally, if asked to provide advice about the lawfulness of a prior decision by the board in which the lawyer-director participated, that lawyer may not be able to offer the best independent legal judgment on the issue.
A lawyer serving on a corporate board
must also be careful not to allow her interests in
the corporation to materially limit her representation
of other clients. If making recommendations about charitable
gifts is part of the legal service a lawyer is providing
to a client, a lawyer serving on the board of a non-profit
organization might be influenced to advise the client
to make a donation to that organization, whether or
not the gift is in the client’s best interest
or best serves the client’s goals. The prudent
lawyer should always treat this as a self-interest
conflict situation and obtain the client’s written
consent to the representation after making full disclosure
to the client of the lawyer’s interest in the
potential recipient and that it might affect the lawyer’s
professional judgment. See OSB Formal Op No
2005-116.
Reporting Wrongdoers
One of the newer obligations of lawyers representing
organizations arises out of Oregon RPC 1.13(b).
If a lawyer for an organization knows facts from which a reasonable lawyer, under the circumstances, would conclude that an officer, employee or other person associated with the organization is engaged in action, intends to act or refuses to act in a matter related to the representation that is a violation of a legal obligation to the organization, or a violation of law which reasonably might be imputed to the organization, and is likely to result in substantial injury to the organization, then the lawyer shall proceed as is reasonably necessary in the best interest of the organization. Unless the lawyer reasonably believes that it is not necessary in the best interest of the organization to do so, the lawyer shall refer the matter to higher authority in the organization, including if warranted by the circumstances, referral to the highest authority that can act on behalf of the organization as determined by applicable law.
Thus, the lawyer who represents a corporation must be cognizant of the legal duties of the organization’s constituents and be prepared to apprise those in charge of any actions the constituents take which may run afoul of those duties. Obviously, common sense should be exercised in determining how to proceed under this rule. A lawyer must normally accept and follow duly authorized decisions concerning the policy and operations of the organization, regardless of whether those decisions may be risky or of questionable utility. The lawyer has a duty to inform higher authorities only when the lawyer knows that the constituent has violated a legal duty which will likely result in substantial injury to the organization. Although not binding in Oregon, the comments to the ABA Model Rules offer some additional guidance in determining when referral to someone higher up the chain of command is appropriate.2
Competence/Malpractice
Much of the perceived danger in serving as legal
counsel to a corporation while sitting on its board
of directors relates to malpractice liability. Additionally,
lawyers may be more visible as targets in third-party
legal actions against the corporation, and may also
be held to a higher standard of care than other board
members. As mentioned, lawyers who represent clients
on a pro bono basis have the same duties as
lawyers who are paid for their work. One of the duties
lawyers owe to clients is the duty to provide competent
representation. Oregon RPC 1.1. When an organization
has a lawyer available at low or no cost, there may
be a tendency for the organization to assume that the
lawyer can handle every kind of legal matter, and a
corresponding desire on the part of the lawyer to take
on whatever needs doing. The fact that the lawyer is
not being paid will not excuse the lawyer’s errors
that result from a lack of knowledge or experience
in a particular area of law.
Avoiding the Dual
Role
Confusion about the role of a director who is
a lawyer (but not officially counsel to the entity)
can be problematic in a variety of ways. The nonlawyer
members of the board may assume that every comment
by the lawyer-director is legal advice, rather than
a business or practical suggestion. Because the existence
of a lawyer-client relationship is tested by the would-be
client’s reasonable expectations, the lawyer
who gives professional opinions may inadvertently create
a lawyer-client relationship with the organization.
Once that relationship is established, the lawyer has
ethical responsibilities to the client and may have
exposure for malpractice liability.
Accordingly, a lawyer who wishes to avoid the dual roles of lawyer and director must take special care to avoid offering opinions that could be misunderstood as legal advice. The lawyer should be cautious about commenting on legal matters facing the board, other than to suggest that legal advice be sought. This does not mean that the lawyer can never comment on any matter that involves the law or legal issues. For example, if the board is discussing plans for a fundraising event, the lawyer-director might point out that state gaming laws limit the kinds of activities that can be conducted without a license. Without more, that kind of general information is not legal advice, since it is not an opinion about how the laws will apply to the organization’s activities. Provided the lawyer-director has previously expressed a clear intention to not be the organization’s lawyer, it is not likely that the organization could make the case that it reasonably understood the relationship to exist.
Another issue that relates to offering professional opinions to the board is the confusion that might occur about the protection that such discussion have. It is a myth that every conversation with a lawyer is a privileged communication. The only communications that are privileged are those that are related to the seeking or giving of legal advice. A lawyer who gives business advice is not giving legal advice, and the discussion will not be protected even if the organization is represented by the lawyer. Similarly, if the lawyer has carefully disclaimed the role of legal counselor, conversations including general legal information will not be protected by the lawyer-client privilege. A non-profit board that assumes it can protect all sensitive conversations with lawyer-client privilege merely because a lawyer participated in the discussion does so at its peril.
Conclusion
Serving on a corporate board can be a challenging
and fulfilling opportunity for lawyers. With due regard
to the complications of playing dual roles and the
importance of clear communications with the board and
the organization’s constituents, lawyers can
serve as directors without violating their professional
responsibilities. To avoid the complications of the
dual role, the lawyer is well-advised to maintain clear
and consistent boundaries regarding the role he or
she intends to play while serving on the board.
Endnotes:
1. This column is taken in large part from materials submitted by the OSB general counsel’s office for the OSB CLE Seminar "Advising Nonprofit Organizations," held June 16, 2006. Additional guidance may be found in ABA Formal Op No 98-410 and "Ethical Dilemnas of the Volunteer Lawyer/Nonprofit Director," The Colorado Lawyer, vol. 23, no. 12, December 1994.
2. The comments can be found at http://www.abanet.org/cpr/mrpc/rule_1_13_comm.html.
ABOUT THE AUTHOR
Helen Hierschbiel is deputy general counsel for the Oregon State Bar. She
can be reached at (503) 620-0222, or toll-free in Oregon at (800) 452-8260,
ext. 361, or by e-mail at hhierschbiel@osbar.org.
Ethics opinions are published and updated on the bar’s website here.
© 2008 Helen Hierschbiel