Academic journal article Journal of Corporation Law

State-Federal Tension in Corporate Governance and the Professional Responsibilities of Advisors

Academic journal article Journal of Corporation Law

State-Federal Tension in Corporate Governance and the Professional Responsibilities of Advisors

Article excerpt


In the 1990s, there was a huge paradox developing that we see clearly now only by the clarity of twenty-twenty hindsight. First, the economy and the securities markets were on the ascendency. Second, reform movements in the fields of voluntary best practices of corporate governance and lawyer ethics were gathering momentum.

As for the economic scenario, after the market peaked in 2000, the technology bubble started losing its "irrational exuberance," in the words of Chairman Greenspan.1 Then in the fall of 2001, the Enron debacle erupted and the bubble burst. Soon thereafter Worldcom crashed. The Powers Report2 on the Enron failure and the Thornburgh Report3 on the Worldcom demise alleged common themes: (1) officers ran amok, wallowing in greed-driven schemes and other abuses; and (2) directors allowed it to happen, tolerating officers who were managing to the market while they contented the directors with ever-rising stock prices. Other corporate disasters were to follow in quick succession.

As for the reform movements of the 1990s in corporate governance and lawyer ethics, major corporations like General Motors were strengthening their boards through voluntary best practices codes. Institutional investors were demanding greater independence and accountability of directors, while the Delaware courts were exhorting enhanced standards of director conduct as the right policy, and as an arguable safe harbor from state fiduciary duty liability concerns. As for lawyer ethics reform, the American Law Institute was producing its Restatement of the Law Governing Lawyers. In 1997, the American Bar Association created the Ethics 2000 Commission with a mission to evaluate the Model Rules of Professional Conduct and to recommend changes, where necessary, to modernize and strengthen the state-based regime of lawyer ethics. The Ethics 2000 Commission reported to the ABA House of Delegates in the fall of 2000.

The first group of the Ethics 2000 Commission proposed revisions4 was debated and voted on by the ABA House of Delegates in the summer of 2001. The remaining Ethics 2000 Commission recommended rule changes5 were adopted in February of 2002. Although the ABA House ultimately adopted nearly every rule and comment offered by the Ethics 2000 Commission, it is significant and ironic that in the summer of 2001 the House rejected the Commission's proposed exception to the confidentiality rule (1.6). The exception would have brought the ABA Model Rules in line with the rules of forty-one jurisdictions, permitting the lawyer to disclose client information when necessary to prevent the client from perpetrating a massive, damaging fraud using the lawyer's services. The atmosphere was shortly about to change. Enron was to crash in just a few months. Worldcom collapsed shortly thereafter. Other disasters followed in short order.


In the wake of Enron, Worldcom and other debacles, markets plunged, innocent people lost significant values in their retirement accounts, and investor confidence plummeted. The major "SROs" (self-regulatory organizations exemplified by the NYSE and NASDAQ) as well as members of Congress rushed to cobble together fixes to such problems going forward. The Congressional legislation, known as the Sarbanes-Oxley Act, was adopted with bipartisan fury in July 2002.6 New listing requirements were also approved last summer by the SROs and recommended to the SEC.7 Although the SEC has not yet acted upon them, these requirements would, in some instances, impose more definitive standards for listed companies than Sarbanes-Oxley would for SEC-reporting companies.

Also at work in this milieu are the Principles of Corporate Governance adopted by the Business Roundtable in May 2002, and the preliminary recommendations of the ABA Task Force on Corporate Responsibility (the "Cheek Task Force"-named for its chair, Jim Cheek of Nashville) released in July 2002. …

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