"The Client(s) of a Corporate Lawyer"

• Author: Thomas D. Morgan
• Position: J.D. University of Chicago
• Pages: 17-47

This Article is a revised version of the presentation given by the author at the 25th Sullivan Lecture Series at Capital University Law School on March 2, 2004.

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I Introduction

It is hard to imagine, even in retrospect, that over less than seven weeks, one of the nation's largest companies self-destructed. On October 15, 2001, Enron Corporation was the darling of Wall Street-the country's seventh largest firm in terms of market value.¹ On October 16, Enron announced it was restating its prior earnings.²

That date was five weeks to the day after the terrorist attacks on the World Trade Center and the Pentagon.³ No one died based on revision of Enron's financial statements, but the effect on American business was almost as profound. Up to $60 billion in investor wealth tied up in Enron shares disappeared forever.⁴ Over 4,000 employees lost their jobs, and many also lost their life savings.⁵

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On December 2, 2001, after more earning restatements appeared in the following days, Enron filed for Chapter 11 reorganization⁶ and suffered at least the practical equivalent of corporate death.⁷ Even more significant, the Enron collapse destroyed both the confidence of many Americans in their business leaders and the expectations of those Americans who thought that their financial future was secure. That loss of confidence has been reinforced by similar problems at WorldCom, Tyco, Global Crossing, Qwest, and other United States corporations.⁸

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The dominant mood in the country has been that whoever contributed to the corporate meltdowns should suffer for what happened. Thus, we have seen criminal indictments of some top Enron officials and the threatened prosecutions of others.⁹ We have seen the collapse of Arthur Andersen, the venerable firm that did Enron's accounting.¹⁰ We have seen a private Securities Act class action filed against Enron's lawyers,¹¹ and claims against lawyers may still be yet to come in the bankruptcy proceeding.¹² We have seen congressional reaction in the form of the Sarbanes-Oxley Act,¹³ and a Securities and Exchange Commission (SEC) response that imposes significant federal regulation on corporate lawyers.¹⁴

Unfortunately, we live in a sound-bite culture that too often likes to offer simple answers to complex questions. We want to find the villains, and we often are not very careful about the accuracy of our characterizations as to who the villains are. However, I submit that it is important that we think about how we should want corporate lawyers to behave in a world of tough choices-and a world of major adverse consequences if the rule makers make bad choices.

The title of this Article, "The Client(s) of a Corporate Lawyer," is meant to be provocative, but as a statement of the law, it is wrong. As we have longPage 20 tried to make lawyers understand, ultimately, a corporate lawyer has only one client-the corporation.¹⁵

The intent of the title is to focus our attention on the many interests that make up a corporate client, but I find that even focusing on clients in a discussion about lawyer ethics is disconcerting to many. We lawyers have traditionally seen ourselves as members of a self-regulating profession whose standards of conduct are largely independent of the wishes or needs of clients. Many decry any loss of that independence.¹⁶ I am less sympathetic to that concern. As I try to understand what is happening in the legal profession today, I will offer six propositions with which I believe any future regulation must deal.

II Six Realities Facing Corporate Lawyers Today

1. Lawyers' problems and challenges are not understandable apart from understanding the world experienced by the lawyers' clients

Artists and musicians can write in relative obscurity for most of their lives, only to be declared geniuses much later. Bach, for example, was an obscure country organist for most of his career.¹⁷ Some of his greatest music was lost for over a century, only then to be treasured.¹⁸

Lawyers tend to act in a different time frame. Our old briefs are rarely rediscovered and savored by later generations. Most of lawyers' professional activity is tied to the concrete problems of today's clients. If we are irrelevant to those clients, we are ineffective. Once in a while, we might file a case that sets important precedent and improves the lives of non-clients as well.¹⁹ A fewPage 21 such cases even change the course of history.²⁰ With few exceptions, however, what we do is bound up in serving current clients' needs today.

I do not make that point to excuse shoddy lawyers' conduct or to say of misconduct: "The client made me do it." Clearly, there are fundamental lines we may not cross. The duty of zealous representation ends, for example, where assisting a client's crime or fraud begins.²¹ On the other hand, what I am saying is that one cannot understand the issues that corporate lawyers face without understanding the issues through the eyes of their business clients.

That latter understanding, in turn, requires us to ask very basic questions about what a business does and what it means to do business in the corporate form. We know that a lawyer represents the corporate "entity," but the term "entity" requires us to think about what interests are affected by a corporate client, which of those interests "count" for the corporate lawyer, and from whom a corporate lawyer is to take direction.

What a business does is simple and, ultimately, almost magical. A business transforms resources of capital and labor into products and services worth more to consumers than the resources that comprise them.²² Thus, a furniture maker takes wood, fabric, machinery, and labor and sells tables and chairs that customers value more than the sum of their components. A restaurant transforms simple groceries and ambience into an experience that customers value more than the elements that, in principle, they could use to create or to purchase a meal for themselves.

If a business person does not add value to the component resources, he or she will soon be out of business.²³ Conversely, the value the business owner does add will be returned to that owner as profit.²⁴ The more value that is added, the more profitable the business will be.²⁵ The more profitable one'sPage 22 business is, the more others will seek to open a similar business, which is yet more effective in adding value.²⁶ Or, others may start complementary businesses that improve the value added by the first. Either way, the process ultimately redounds to the benefit of both consumers and business owners.

In the midst of scandals such as Enron, Worldcom, and the like, this kind of back to basics thinking is important. Ordinarily, corporate lawyers should have no reason to feel ashamed of what they do. Helping business owners in creative and transformative activity is a noble calling that can provide significant social benefit. It is work of which a corporate lawyer can be proud.

As I have described business activity so far, nothing has turned on acting in a corporate form. As our furniture maker or restauranteur becomes larger, however, more people will become involved in the activity, and the relationships among those people will almost certainly have to become more structured. That leads to my second proposition.

2. Many interests are enmeshed in the activities of any substantial corporate entity and are affected by its decisions and its success or failure

First, for example, use of the corporate form permits investors to provide capital and share the benefits and risks associated with company growth.²⁷ It also allows investors to limit their potential liability to the amount that they invest.²⁸ A corporation's investors include not only the original entrepreneur and current managers, but often hundreds or even tens of thousands of others.²⁹ We loosely call the investors the company's "owners," but realistically, most of them have neither the ability nor the interest to affect the company's activities.³⁰ Instead, they are residual beneficiaries of the company's success and among the first to experience its failure. To the SEC and many membersPage 23 of Congress, they are said to be the persons who are principally affected by a company's activities. I disagree with making the interest of investors the only relevant interest, but I do not doubt that it is appropriate to give prominence to that interest.

A second major corporate interest is that of the company's employees. Indeed, if the company is not successful, the employees will lose their jobs. Some employees work for only a short time and may almost be seen as interchangeable units of production. But for many of a corporation's most valuable employees, the work they do is not only a source of their own financial support, it is part of their...