Non-executive directorships - chief executive, Scottish law firm
Q11: What are your views on partners holding non-executive directorships in client companies? These seem to be ideal opportunities for partners to gain valuable experience in the running of companies (as well as being able to contribute their own experience) but some firms seem to be against this because of conflict of interest situations arising.
RESPONSES
9 April – Partner, Top 100 law firm
We tend to be against this as regards commercial clients for conflict of interest reasons but are more supportive of directorships in non commercial clients such as charities and learned institutions.
9 April – MP, Top 10 property firm
We have an absolute ban on such appointments in our employment contracts and partnership deed, so that anyone wanting to hold such an appointment has to seek and obtain the MP's approval. Any major roles have to be approved by our Board.
There are advantages in getting Board experience, but equally we tend to find that a Board seat prevents the firm getting work from that client. It is rarely a way to open a door to a large revenue stream which would not otherwise have been there.
We are generally supportive of partners taking pro bono positions in charities, housing associations and arts organisations.
9 April – MP, Top 100 law firm
I have not had to deal with this question as MP thankfully. Several years ago we did have a partner who became a non exec of one or two client companies. The work was mainly done by others. The biggest area for conflict was through rewards where more than one of his companies gave him a large number of options (which all ended up being worthless). He refused to pass the benefit of them to the partnership. I think my answer would probably be that it would depend on the client and it would depend on the partner and provided the rewards arrangements were clearly identified at the outset I would probably agree to it.
9 April – Chief Executive, Top 5 Australian law firm
Careful use of non-executive director roles is positive. The main thing to avoid is the lawyer concerned providing any legal advice to the company of which a director. Top lawyers need to have a superior understanding of business, and be well known and respected, and board experience helps. Appointment always on a case by case basis with many potential roles not being possible due to conflicts of interest. Most boards do not go out to hire lawyers for boards, so the lawyer candidates must have some broader experience or skills in order to be attractive.
9 April – Chairman, Global law firm
We have a strong policy against our partners accepting non-executive directorships with clients. We think such directorships raise conflict questions and complicate liability questions.
9 April – MP, Scottish law firm
It would seem to be a good idea if it is about adding value to a client company and giving experience to a partner but to avoid conflicts it would sense to ensure that there is a clear understanding who is the director there on behalf of - i.e. it is a personal appointment and not on behalf of Legal or other firm and that it most cases it is likely to be better that the Law firm is not seeking to provide legal advice to that client.
10 April – Finance Director, Magic Circle law firm
It must be a conflict. Supervisory Boards in Germany have a different context and can be less awkward but NEDs responsibilities to shareholders and a position of advising the company simply don't mix.
10 April – Director, Patent agents
We allow executive Directors of our own firm to be non-executive Directors of other companies, including client companies. Obviously Directors must be aware of the potential for conflict of interest, and there will be some decision making processes taken by the client company board of which he/she may decide to sit out. Approval has to be sought from our own Board before taking on a non-exec Directorship. In our experience the individuals and both companies benefit.
16 April – MP, Top 50 law firm
In our experience the main driver behind an appointment as a director is to cement the client relationship or to raise industry profile or because the partner has a personal interest eg. it’s a family company. It’s unlikely to be to obtain experience in running a company per se – that’s not what a full time partner in this firm should be doing.
Many partners let alone clients do not understand the issues if a partner is appointed a director. Potential for conflict is only one of them. All directors, including non-executive directors, have duties and obligations over and above legal advice. For internal partnership purposes, a written protocol may be helpful.
Issues we have considered include:
- Is the Partnership liable for a partner’s acts and omissions as a director - this may depend on the legal form of the “partnershipâ€(e.g. if an LLP) and indemnity provisions in the partnership documents.
- Is that liability covered by the firm’s PI insurance? – what about non-legal advice such as “business†acts/omissions? Is it acceptable if the partnership’s PI insurance and excess are at greater risk because a partner is a director than if he/she were not?
- Is it appropriate/effective by agreement with the company to limit the firm’s liability to legal work only? If the directorship is of a company that is not a client, (eg pro bono or other voluntary/charitable activities), is it appropriate for the company to be told that the Partnership accepts no liability for any acts or omissions of the director?
- Should any director’s fees/benefits belong to the Partnership or to the partner personally? How is this reflected in time recording/billing? It would be inconsistent for the Partnership to charge for non-legal work/time of the partner/director if it does not agree to be liable for it. What are the tax issues if fees/benefits not billed by the Partnership are accounted for by the partner/director to the Partnership?
- The company may need to be advised not just about the potential for conflict between it and the partner, but about legal advice privilege issues.
Whilst being a director may be good for client relations, is there a possibility that close association with one client in an industry sector may make it difficult for legal advice to be given to other companies in that sector?
- The attitude of other partners within the Partnership:
- is there a concern that the appointment adversely changes the (perceived if not actual) relationship between the partner and the client company?
- are partners concerned that a partner/director is personally exposed to additional risks/duties not related to legal work? Is Directors & Officers Insurance to be a minimum requirement if there is no cover under the firm’s PI insurance?
- do partners accept the risk that if the company receives adverse publicity there may be reputational issues for the Partnership or that if the company gets into difficulty, the partner/director is likely to be concerned as to his/her personal position which may affect the partner’s objectivity and, at the least, be a distraction?
- Should partners agree to resign as directors if so required by their colleagues? – in what circumstances might it be expected legally that the director would have to continue as a director eg insolvency and the requirement to take every step to protect the interests of creditors?
- Should prospective directorships be notified, justified and approved by the Senior Partner/Managing partner in advance? Records of directorships and benefits should be maintained centrally along with copies of any letters written addressing the above issues.
- What is the approach taken in the case of consultants or other senior non-partner staff who are directors?
We currently take the view that these issues do not require us to prohibit partners from being directors of client companies. We can envisage that this view may have to change in the medium/long term as perceptions and practices change, but not yet. We do however ensure that we have in place with each company, a letter which deals appropriately in each case with the issues raised above.
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