Legal and CorpGov Best Practices Aren’t Always Aligned


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“Well, if our corporate counsel’s principal role isn’t to guide the board with respect to best practices, then why are we paying them so much to attend our board meetings?”

That’s the question I was recently asked by a flummoxed small-cap chairman, when I advised him and the other board members that just because the board members were complying with relevant sections of corporate law didn’t mean that their conduct constituted “best practices.”

The concept of businessman with missing jigsaw puzzle piece

This board, like many pre-IPO and small-cap boards, failed to appreciate a poignant nuance of boardroom counsel: For better or worse, the lion’s share of corporate lawyering is focused on culpability avoidance as opposed to governance excellence.

To be sure, there are some corporate lawyers who have a keen sense of what corporate governance best practices look like today, and they do a terrific job of educating and advising boards accordingly.

But it’s critical for pre-IPO and small-cap directors, especially those who are comparatively new to board service, to keep two things in mind: not all corporate attorneys comprehensively understand governance best practices; and, the default setting of boardroom counsel is to make sure board members are staying on the right side of Delaware’s General Corporation Law (or other applicable corporate laws).

Unlike years ago when law firms were smaller and conflicts of interest were more manageable, today there are many lawyers who have never served as a director on a corporate board. Moreover, many have never attended a corporate governance continuing education program, or counseled institutional investors. Accordingly, it’s easy to see why myriad corporate lawyers simply aren’t apprised of what constitutes a high performing board of directors in today’s capital markets.

Of course, the principal role of any attorney is to provide legal advice, not business advice. In the boardroom setting, legal advice often consists of ensuring that directors are discharging their relevant statutory and common law obligations, and that, to the extent appropriate, evidence of the same is accurately memorialized.

The line that demarcates legal and business advice can be a fuzzy one, particularly in a boardroom. Moreover, lawyers and clients (board members, in this case) are often each inclined to conflate the two. Conflation can lead to bad results.

In the situation alluded to above, an investor had amassed a material ownership position and wanted to speak with the chair of the nominating and governance committee to discuss how the board viewed its current composition. The company’s lawyer advised the board that there are no such requirements under Delaware law, and took the added step of discouraging the investor–director communication saying that “board members have no legal obligation to meet directly with investors, and they shouldn’t do it.”

As it turned out, this lawyer was completely unapprised that investor-director communication has become commonplace (with appropriate safeguards and under certain circumstances), and the predominantly inexperienced board members were deferential to the attorney believing that they were receiving timely, thoughtful advice.

The matter escalated quickly when the aggrieved investor began conferring with other large investors about the company’s unwillingness to address the board composition questions. When the board members subsequently pushed back on the “legal” advice they had received, the attorney had to admit that he wasn’t aware of the rapid evolution in capital markets communication practices.

The moral of the story is simple: boardroom legal advice and corporate governance best practices aren’t always the same thing.

This post was previously published on LinkedIn Pulse. 


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A globally recognized small-cap expert, Mr. Epstein has advised, governed, and invested in hundreds of small-cap companies. His capital markets and corporate governance acumen are products of a singular perspective – a former corporate attorney, operating executive, institutional investor, and, now, board advisor. As Bloomberg Businessweek commented regarding Mr. Epstein’s category-defining corporate governance book, “attention, directors of small-cap companies. Help is on the way.” 

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