As CEO of a publicly traded company, you may think your company’s law firm offers comprehensive, high-quality boardroom counsel – and they might.
But as a former lawyer and institutional investor who now advises many pre-IPO and small-cap boards about how to navigate the boardroom issues investors care most about, I am constantly in boardrooms. Whether it’s solo practitioners, regional firms, or global titans, the quality of counsel I see day in and day out in boardrooms is underwhelming at best, and arguably declining with the passage of time. It’s no wonder that many of my firm’s clients repeatedly state that the leading cause of changing counsel isn’t price or responsiveness, but the quality of advice.
To be sure, counseling public company boards is predominantly an exercise in ensuring that board members are discharging their multifaceted duties in accord with applicable laws and regulations. But today’s capital markets don’t reward companies (or CEOs) overseen by boards that are principally in the business of “box checking” or “culpability avoidance.”
As CEO, You Can’t Afford This
The rub in the capital markets is that too many boardroom lawyers are focused only on compliance, while stakeholders are demanding governance excellence. Query whether you would invest in a company governed by model fiduciaries, who don’t know the first thing about what constitutes governance best practices in 2017. For example, a board member could follow the letter of the law and decline to meet individually with investors. But that company might not have too terribly many investors at the end of the day since this dialogue is increasingly demanded by investors.
It’s important for CEOs to understand some key reasons why the quality of boardroom lawyering has eroded.
1. The evolution of the law firm business model has resulted in lawyers moving from firm to firm more often. Consequently, the emphasis upon fulsome training for junior attorneys makes less and less financial sense.
2. Dramatic changes in the capital markets have outpaced many lawyers, law firms, and law schools. Understanding salient aspects of Delaware law is only a starting point; effective boardroom lawyering requires an appreciation for governance best practices that drive long-term shareholder value creation.
3. Transience isn’t limited to lawyers; that is, clients come and go more regularly now than in years past, so lawyers aren’t always rewarded for investing the critical time necessary to understand client businesses and industries.
4. Whether due to conflicts of interest complexities or the ever-increasing focus on billable hours/revenue, lawyers serve on fewer and fewer boards. When lawyers don’t serve on some type of board in their careers, expert boardroom counsel will be harder for them to achieve.
When my firm advises law firms and attorneys keen on providing superior boardroom counsel, I tell them to consider the following measures. CEOs should consider inquiring about all of them.
1. Corporate governance best practices have historically been handed down from larger public companies in the United States; accordingly, corporate governance scholarship and continuing education programs have depicted corporate oversight as one size fits all. Nothing, however, could be further from the truth; governing Pfizer is nothing like governing a nascent, one-product biotech company. Inasmuch as the overwhelming preponderance of public companies are small (e.g., nearly 80% have market capitalizations below $500 million), counsel need to be mindful of resources, experience (both in the C-suite and boardroom), and the unique capital markets realities that affect smaller public companies when providing advice.
2. Lawyers intent on providing high-quality boardroom advice need to have a more fulsome sense of business, including, but not limited to, accounting, capital markets, and corporate finance. Whether this education is undertaken formally or informally, the law industry needs to pay more than lip service to the fact that boardroom advisory doesn’t take place in a vacuum. Operating and governing a public company today is a complex, three-dimensional chess board. While boardroom lawyers must possess a firm command of relevant laws and applicable industry, market, and securities regulations… that’s only part of the puzzle.
3. Corporate lawyers should make the comparatively small financial and time commitments necessary to attend their clients’ industry trade shows and investor conferences to get a sense not only of macro business trends affecting clients’ businesses, but also garner more timely, better appreciation of top-of-mind issues for institutional investors. Memo to the Bar: institutional investors are the most important arbiters of governance efficacy, not the judiciary.
4. Attorneys who counsel publicly traded companies in the U.S. should strongly consider attending corporate governance continuing education programs to get a better sense of the challenges corporate directors face. It’s shocking how few corporate lawyers have refined understandings of how issues like, for example, cybersecurity, globalism, shareholder engagement, sustainability, and diversity are impacting what transpires inside America’s boardrooms.
To be sure, there are superior boardroom counselors in the United States. But to those who are regularly in boardrooms, the gulf between the legends of boardroom lawyering and everyone else is growing… fast.
Consequently, CEOs and their shareholders are suffering, and law firms of all sizes are losing business every day as a result.
I discuss more detailed recommendations in this regard for CEOs, law firm partners, and law firm associates in this webinar.
The author, Adam J. Epstein, is a former institutional investor, and now an advisor to CEOs and boards of pre-IPO and small-cap companies through his firm, Third Creek Advisors, LLC. He speaks monthly at corporate governance and investor conferences and has appeared internationally more than 100 times since 2012. Mr. Epstein is a key contributor to Nasdaq’s new Amplify small-cap content initiative, and a distinguished National Association of Corporate Directors (NACD) Board Leadership Fellow, and faculty member. He is the small-cap contributing editor for Directorship magazine, author of The Perfect Corporate Board: A Handbook for Mastering the Unique Challenges of Small-Cap Companies (New York: McGraw-Hill, 2012), and contributing author to The Handbook of Board Governance: A Comprehensive Guide for Public, Private and Not for Profit Board Members (New Jersey: Wiley, 2016). In June 2017, The Perfect Corporate Board was the #1 ranked corporate governance book on Amazon.com, and, in June 2016, The Handbook of Board Governance was the “#1 New Release” in corporate governance on Amazon.com. Connect with Adam on LinkedIn or learn more at https://adamjepstein.com/.