It was the biggest political story in New South Wales for years, and two law firms were caught in the muck.

Old ghosts have come back to haunt Baker & McKenzie and Colin Biggers & Paisley (CBP) as the Independent Commission Against Corruption (ICAC) has looked into the conduct of former NSW mining minister Ian Macdonald and Labor Party powerbroker Eddie Obeid.

In January this year, the former Sydney-based global chairman of Bakers, John McGuigan, was summoned to the ICAC inquiry. McGuigan was one of seven owners of Cascade Coal, a company that sold a 25 per cent stake to an entity controlled by Obeid.

It was alleged that McGuigan benefitted from inside information on the granting of coal licences.
With the stench of corruption wafting around Macdonald and Obeid with regard to the granting of mining licences, CBP also felt some of the media’s spotlight due to its relationship with the Obeid family.

“In the middle of all the media frenzy around the ICAC inquiry there was no mood to radically change
anything we had been doing in the past,” says Dunstan de Souza, the managing partner of CBP, who didn’t shirk an interview request from Lawyers Weekly with regard to this story, unlike several other law firms. “When we took on those directorships, there were no allegations of any impropriety.”

When Labor was in government in NSW in the first decade of this century, CBP had acted for the Obeid family.

CBP partners were also directors of companies with links to the Obeid family. Current partner Greg Skehan was a director of Australian Water Holdings (AWH) from mid-2009 until January this year. The ICAC inquiry heard that the Obeids sought a multi-million dollar stake in the company in 2010.

Skehan resigned from his directorship at AWH when such revelations meant he and the firm wanted to put some distance between themselves and the Obeids.

De Souza says Skehan’s position in the partnership was never in jeopardy.

“We have never hinted at that,” says de Souza, adding that CBP “doesn’t operate a partnership like that”.
“The view that Greg came to is a view the partnership supported but it was his decision and it was never even contemplated that Greg would make another decision.”

Skehan has maintained he did not know the Obeids had a stake in the company.

De Souza delegates

While Skehan has retained his partnership position, CBP has radically altered its approach to members of the partnership sitting on company boards.

Previously, it was de Souza alone who gave the green light or vetoed any board appointments.

Now, in the wake of ICAC, a corporate committee has been set up to judge the appropriateness or otherwise of each and every director’s position.

This includes fresh offers to members of the partnership and existing board appointments.

“We had a situation with directorships being taken up that had an effect on the firm’s reputation,” says de Souza.

“Sometimes with the best of policies you get a bad outcome. We just wanted to see if there was anything in the policy that needed tweaking to see if we could avoid this in the future or minimise these sorts of consequences in the future.”

The new corporate committee comprises a partner from each of the firm’s offices in Melbourne and Sydney, with an additional three members of the firm.

“It is not like we thought we did anything greatly wrong, the real difference is that I said instead of these issues just being determined by me — I was not comfortable with that — I asked that there should be a broader review of these applications,” says de Souza, who is himself a member of a number of corporate and charitable boards.

Too close for comfort

Law firms have a lot to lose, as well as having a lot to gain, by having lawyers sit on company boards, particularly those of a client.

On the plus side, there is the opportunity to cement ties with a client and also impress other non-executive directors who may be captains of industry with other corporations.

However, as the CBP example with the Obeid family demonstrates, the reputational fallout when a company or its senior figures behaves badly means that it is often directors, many of whom might not have any involvement in day-to-day activities of the company, that are hit by the debris (see ‘Caught in the middle’ box).

Ian Ramsay, the Harold Law professor of commercial law at the University of Melbourne, believes that law firms should not accept directors’ positions on the boards of companies that are clients.

“The disadvantages loom really large in that situation,” says Ramsay, acknowledging that such positions are enticing to law firms in seeking to strengthen the links with corporate clients. However, he believes that by accepting such positions you open up a Pandora’s Box of potential conflicts of interest, which means the cons outweigh the pros.

“The law firm doesn’t have much control about what the director does when on the board of a corporate client,” he says.

“Generally, when we read in the media about directors appointed to the boards of corporate clients, by and large the news is negative, because it is when problems arise in terms of public inquiries or in terms of litigation ... that we see law firms reassess any current appointments.”

CBP is certainly currently reviewing its board positions, but de Souza remains defiant on one point: there will be no blanket ban on taking up board positions with client companies.

“There are times we [take a board appointment] to assist our clients,” he says. “Every now and then in those circumstances, even though there is no value to the firm, there is a value to the client and there is a value to the partner.”

“If law firms don’t want to help their clients and partners in that way, that is fine, we are still, if you like, a profession, we still approach the practice of law as a profession, we still feel the welfare and happiness of our partners is important.

“In some circumstances the law firm will take a risk in the interest of those other entities.”

CBP is certainly not alone in allowing lawyers to sit on the boards of client organisations.

A number of high-profile law firms have partners that sit on the boards of client firms.

Gilbert + Tobin managing partner Danny Gilbert sits on the board of the National Australia Bank, while senior Allens partner Ewen Crouch is a non-executive director with Westpac.

Both those banking behemoths are regularly in the news for negative reasons, particularly regarding interest rate adjustments that don’t fully pass on official RBA cuts.

The lucrative client-advisor relationship that both those firms enjoy with two of Australia’s largest banks makes such board positions very attractive.

However, it might not be as attractive from the corporation’s perspective to appoint a partner from a firm that it outsources legal advice to.

“When potential conflicts arise, there is a question around if the director has to absent themselves [from specific board discussions],” says Ramsay. “That is occurring more and more frequently and there is then a question on the value the director is adding to the company.”

Despite the need for law firms to strengthen their ties with clients, Ramsay also warns that lawyers who sit on client boards need to be aware that they might also face a more stringent test of duty when compared to directors from other sectors.

“Litigation where a director has faced a conflict of interest potentially applies a heightened standard of care,” he says.

“That comes out of a HIH Insurance case where the judge said that a director of a company that has a potential conflict of interest needs to exercise special diligence calling for scrupulous concern.”

We want you

A large number of lawyers sit on the boards of not-for-profit organisations or non-client companies.

Baker & McKenzie Australia’s managing partner Chris Freeland is the chairman of the Sydney Film Festival, while Holding Redlich’s Sydney managing partner Ian Robertson is the chairman of the board of Film Victoria.

Ramsay believes the skills lawyers possess means such appointments are entirely appropriate.

“Lawyers are attractive to companies because of the legal expertise they bring, and being a partner at a law firm also brings with it a reputational weight,” he says. “It can be a highly appropriate appointment if the director brings the right expertise and experience.”

There is some evidence from overseas that suggests having lawyers on boards helps to improve the strategic decision-making of those companies.

An American study released in February looked at directors’ appointments within public companies between 2000 and 2009.

The three authors, legal academics Charles Whitehead, Simone Sepe and Lubumir Litov, found that the advantages of having lawyers as the directors of public companies outweighs the costs. “On average, a lawyer-director increases firm value by 9.5 per cent, and when the lawyer is also a company executive, the increase rises to 10.2 per cent,” said Whitehead when talking to the Cornell Chronicle. “Our intuition is that a lawyer-director brings a special perspective based on their training and experience with the law and legal issues and an appreciation of doing things ‘by the book’ that likely comes with it.

“Factors other than independence, such as training, skills and experience, can be as or more valuable to the firm and its shareholders.”

In particular, the report found that having lawyers on boards curbs corporate risk-taking.
De Souza agrees that lawyers have special skills and says that part of his rationale for taking board positions, and that of other lawyers, is based on philanthropy.

One of de Souza’s board appointments is with the Sisters of Mercy in Parramatta

“The reason I sit on boards is because it is giving back,” he says. “It is part of my personal philosophy; it is not a business decision.

“I have been blessed with certain skills and talents and I enjoy using those for things other than myself.”