The Oxford Project: A Corporate Law Ethicist Responds

By Joan Loughrey, University of Leeds

A debate has been taking place on these pages regarding whether financial services should be professionalised to promote market integrity and reference has been made to lawyers as a professional group. 

The merits of professionalism are deeply contested. On one view professionalism promotes ethical behaviour, and professional privileges such as monopolies, closure and self –regulation serve the public interest by ensuring professionals’ ethical values are not eroded by market forces. Another view is that the professions are anti-competitive self-interested cliques, concerned to protect their market position and promote their status. The behaviour of corporate lawyers lends support to the latter argument.

Corporate lawyers seem well placed to promote market integrity, by acting as gate-keepers and advising their clients against unethical conduct, refusing to assist it or even whistle-blowing in serious situtaions. However the worldwide professional response to the Sarbanes-Oxley Act indicated that corporate lawyers were not prepared to do this. As Legg has pointed out, lawyers argued that this conflicted with their fiduciary duty to the client. Yet treating commitment to the client as an overriding consideration fails to discharge the indisputable duty of corporate lawyers to act as officers of the legal system.

It is well recognised in the litigation arena that the interests of the client sometimes have to give way to public interest in the administration of justice. In the context of the markets, commitment to the client should similarly have to yield to the goal of promoting market integrity. Not only is the profession reluctant to concede this, its commitment to client interests has caused indivudal members to be active participants in conduct that has misled markets and in other unethical behaviour as the James Hardie affair, the BAT litigation in Victoria, Enron and the financial crisis itself, has revealed.  As Vines points out, financial institutions regularly ‘contract around’ protective regulations, but they could not do this without the assistance of legal professionals. Significantly much of this is not rogue behaviour, but results from lawyers’ adherence to the core professional value of client loyalty. 

At the same time an inculcated ethical commitment to core professional values is unlikely to be the full explanation for this privileging of client interests. Commercialism and organisational pressures also have a role.  It is no coincidence that dedication to clients’ interests serves lawyers commercial and professional interests, whereas gate-keeping obligations runs contrary to these, by threatening lawyers’ relationships with powerful clients and key income streams. It is  telling that  UK research into conflicts of interest indicates that where clients interests do conflict with the  lawyers’ commercial interests, then the latter may prevail over the former.  This also explains why reputation is no constraint on such unethical behaviour: lawyers’ reputational capital is based on an unswerving commitment to client interests. 

What, therefore, can be learnt from legal professionals? Firstly codes of ethics alone cannot be relied upon to promote market integrity, where adherence to such values conflicts with the professional’s interests. Professional values may also work contrary to this policy goal. Nevertheless, as Vine and Sanders argue, there is merit in articulating the values that we expect market participants to adhere to. In the case of lawyers certainly this process may challenge unexamined self-serving assumptions held in good faith. Again the possibility codes of ethics educating, socialising and inculcating professional ideals cannot be dismissed. In the context of the legal profession, the rules of conduct should include a commitment to stay within the spirit as well as the letter of the law, acknowledge that corporate lawyers have gate-keeping, and even, in extreme situations, whistle-blowing duties. 

Account also must be taken of the fact that professionals work in large bureaucratic organizations, many are employees and all are subject to market pressures. The days of the autonomous professional ble and willing to exercise a strong ethical discretion free from market forces are long gone.  Incentives to behave with a lack of integrity must be removed or counter-balanced.  One option is a strong form of entity regulation that penalises the creation of a culture that encourages unethical behaviour, (such as a system that punishes those who resist unethical client demands and rewards those who concede through promotion and partnership) as well as regulating the individual.  While it is important for individuals to take responsibility, regulating individuals alone, the traditional professional model, is insufficient. 

Meanwhile professional regulators generally react to client complaints and so have not proved effective at dealing with behaviour that pleases clients but subverts the public interest. In the UK, the largest law firms have resisted regulation by a body that they consider to be out of touch. While the UK regulator has embarked on initiatives to improve this relationship, there is little sign that it has got to grips with the ethical problems presented by large firm practice, nor that it has the political power to address them.    

Market incentives are not the answer either. With lawyers these have a perverse effect, by rewarding behaviour that serves client interests, but undermines regulatory safeguards, while punishing lawyers who act as gatekeepers through the loss of clients. 

In sum,  while legal professionals have an important role in promoting market integrity, neither professionals nor professionalism can be left to achieve this goal. Codes of conduct, individual regulation, entity regulation combined with a principles based approach are part of the answer.  Ultimately  though, these are nothing without a strong regulator.  

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