Remembrance
of things past & present (28)
by
Roderick Ramage, solicitor, www.law-office.co.uk
first
published in New Law Journal on 28 June 2019
DISCLAIMER
This article is not advice to any
person and may not be taken as a definitive statement of the law in general or
in any particular case. The author does
not accept any responsibility for anything that any person does or does not do
as a result of reading it.
NB This
version of my article were differs slightly from the version published in the
New Law Journal, largely in order to enable the latter to be fitted into one
page of the print copy.
remembrance
of things past & present
None of us should be surprised by
the recurring threat of
competition
from accountants, (a response to a note in the NLJ on 14 June 2019).
can companies be trusted?
It depends.
Fifteen years ago, the questions were What did Sir David Clementi say in his final report on
his Review of the Regulatory Framework for Legal Services in England and
Wales? And, what will be the
consequences? To the first he answered, between the lines,
that commercial incentives rather than ethics should be relied on to uphold
professional standards. To the second,
Parliament enacted the Legal Services Act 2007, by which alternative business
structures (ABSs), in which the ownership of law firms could be split from
their management, so that a law firm with outside equity investors or an
existing business (eg Tesco, the RAC, the Co-Op, accountancy firms), may be
registered and authorised to practice the law as solicitors. The questions that might be asked now are:
What has happened? And does it matter?
corporations and individuals
Law and
morals are uneasy bedfellows. The concept
of a moral or an immoral corporation is an oxymoron. A corporation is an artificial person with
such powers as are given to it by statute or its constitution, its articles of
association in the case of companies incorporated under the Companies Acts
2006.
I use the
word “corporations” to mean commercial (for profit) companies, some or all of
whose shareholders are not its directors or managers (ie with outside
investors), and “individuals” to mean not only natural persons but also (i)
partnerships of natural persons and (ii) companies in which all the
shareholders are also directors or managers (ie with no outside
investors). The distinction is important
in the context of trust, morality etc.
Individuals
can be greedy, dishonest and generally nasty and they can also be generous,
conscientious and generally want to do the “right thing”. That is human nature. The conduct of individuals is governed by
influences including the law, economics and morality. For some money is the only purpose of work
and for others it what you hope to get if you do your work right.
In contrast
corporations have only one function, which is to make profits, and if they have
to lie, cheat, steal or kill to make money, they will do so: although tobacco
companies have no intention of killing anyone, it is beyond medical doubt that
their activities do kill (ie shorten the lives of) their customers. Corporations may obey the law (or even do the
right thing), but not on moral grounds or because it is the right thing to do.
Someone will have worked out whether it is more profitable to obey the law or
to flout it and pay the fine.
the law
The company
law duty of a corporation’s directors, long and well established by the courts,
is to look after the interests of the shareholders, which means the
maximisation of profits (whether income or capital). Directors who pursue any other aim are in
breach of their legal duties. For
summaries of the two most commonly cited authorities are the English case of
Hutton v West Cork Railway and the US case of Dodge v Ford Motor Co, see my
original NLJ article (12 May 2006, article 19 in my non-pension law articles).
Section 172 of the Companies Act 2006 codifies directors’ general duties as follows.
(1) A director
of a company must act in the way he considers, in good faith, would be most
likely to promote the success of the company for the benefit of its members as
a whole …
Sub-section
(1) continues by requiring directors to have regard to various matters including
the likely consequences and the interests of employees. Sub-section (2) contains the following
exception.
(2) Where or
to the extent that the purposes of the company consist of or include purposes
other than the benefit of its members, subsection (1) has effect as if the
reference to promoting the success of the company for the benefit of its
members were to achieve those purposes.
conflict of
interest
In evidence
to Clementi, the Bar Council, in contrast with the Law Society, which failed to
address the question, said
… the conflict that would inevitably arise between the commercial
interests of the owners and the ethical duties on which the practice of law is
based. An owner of a law firm who was
not a lawyer and therefore not subject to those duties would be perfectly
entitled to pursue his own financial interests, even in circumstances where
those conflicted with the best interests of clients of the firm or with other
core values of the legal profession.
Clementi
dismissed the point without reasons, saying,
It is
not clear, however, that the Bar Council’s argument is correct.
Thus we
have a law, in which conflicts of duty for professional staff are structurally
built into the models for professional practice with outside investors, so one
must rely on regulation alone to ensure that corporate providers of law
services behave in a “proper manner”.
regulation v ethics
There is no
doubt that a corporation can work to the highest professional standards if it
pays to do so, but I am not sure how far I would rely on Clementi’s
illustration of a corporation’s commercial interest in doing so:
Unlike
most high street solicitors, companies such as these have nationally known
brand names to protect, which may be a powerful incentive to operate in a
proper manner.
When you
regulate individuals, eg to maintain professional standards, you are halfway
there, because most of us want, more or less, to do the right thing but need
guidance, and a few need to be stopped in their tracks. Regulating corporations is totally
different. No matter how “good” an
individual working for a corporation might be, the corporation itself knows
nothing of good or bad, of public interest or doing what is right. Its directors’ duties are not to do what is
right, unless it happens to be in the corporation’s (ie its shareholders’)
interests. A regulator of a professional
individuals has only to deal with the bad apples (hopefully a minority) and
give guidance to the rest of us, but a regulator of a profession of
corporations must deal with bodies, which are driven solely by their
non-professional shareholders’ demands to maximise profits, and so must set
procedures on the assumption that there is no intrinsic willingness to follow
guidelines.
The
consequently increased reliance of regulation carries two dangers, one being
over-regulation and the other being that high grade crooks are smarter than
regulators. If we are to have outside
shareholders, we will also need a corporate structure, which, whilst not losing
the profit motive, draws back from the excesses to which we are inevitably
driven by Hutton v West Cork Railway and Dodge v Ford.
the s172(2)
solution
An answer to
the ethics and regulatory problem is to require that every ABS with non-lawyer
investors and managers to entrench in its articles, the purpose of (say)
practicing law in accordance with the mandatory principles in part 1 of the
Solicitors Regulation Authority handbook.
This would not be a cure-all, but it would provide a strong defence to
professional staff, if put into a conflict between professional ethical and
corporate pressures. If an “outside”
investor were to object to such a requirement, one must assume that, where
there is a conflict of interest, commercial pressures will be bound to outweigh
professional standards.
future
reality
Early in his first presidency, during the extraordinary
rendition scandal, George W. Bush was
advised by Alberto Gonzales,
the White House’s chief legal adviser, that parts of the Geneva Convention on humanitarian
treatment in war were “quaint” and “obsolete”.
In the
years from then until now, the coalescing for the profession into fewer larger
bodies with offices in all parts of the country, is that the financial pressure
of running large practices and the (risk of the) consequential detachment of
the “equity” members of firms from the direct practice of the law create
conflicts between commercial and ethical standards, even without outside
investors. If that is so, we might have
to accept that increasing regulation, rather than individual ethics, is the
main method of maintaining standards and that the concept of personal responsibility
for professional ethics too is regarded by many as quaint and obsolete.
END
copyright Roderick Ramage
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