The Standards and Guidance Committee of the Law Society has published guidance for private practice solicitors on the issues to be considered before accepting an appointment as a non-executive director. The Law Society and the Department of Trade and Industry (DTI) do not consider that the two roles are necessarily incompatible but that they may be in certain circumstances and the guidelines aim to help prevent conflicting situations from developing.
The guidance has been issued following consultations with the Law Society Company Law Committee and the DTI.
In June the Committee on Corporate Governance published its Combined Code which sets out the principles of good governance and a code of best practice. The publication is a combination of the Hampel Committee's final report and the Cadbury and Greenbury Reports. The Combined Code emphasises the importance of non-executives in the balance of a company's board, acknowledging the importance of a degree of objectivity from the day to day management of the company. The code recommends that non-executive directors should comprise not less than one third of the board (Provision A.3.1, Combined Code).
The duties that directors owe to their shareholders and that solicitors owe to their clients may in certain circumstances be incompatible:
A director solicitor who is closely involved in advising a company will normally be instructed by the board of that company to carry out its instructions. This may put him in a position where he is unable to be independent of the board and therefore unable to fulfil the role of non-executive director.
Particular areas which may create incompatibility include:
The latest (1996) Guide to the Professional Conduct of Solicitors contains the existing Law Society guidelines on the subject. This requires a solicitor who is a director of a client company (or a shareholder) to consider whether he is in a position of conflict when advising the company. If a conflict or a significant risk arises or a solicitor's ability to act impartially is inhibited he must decline to act.
The guidance identifies five situations where the chances of conflict arising can be minimised.
The guidance recommends that where a solicitor who personally advises a company becomes a non-executive of that company, the firm should consider whether a different person should advise the company. Firms should keep under review the relationship with client companies of which partners are directors. If any potential conflict is identified the guidance advises that the firm informs the company and agrees in writing a process to identify any issues of conflict.
When accepting an appointment as a non-executive director of a client company the solicitor should consider whether he should personally stop providing legal services to the client.
The involvement of a solicitor as a non-executive director will, in most circumstances, involve some form of payment by the company. The nature of any payments should be clarified with the company including the implications in terms of VAT and income tax. Will the payments be on a fee basis for legal services or in the form of director's remuneration?
It is important to be aware that a solicitor director of a charity company is a charity trustee and must be alert for possible conflicts of interest. Before accepting an appointment as a director of a charitable company a solicitor ought to be familiar with the general legal framework in which charitable companies are administered and the particular provisions of the constitution of the company (and its parent).
Directors' authorities to charge for their services are almost invariably more limited in the constitutions of charitable companies than they are in the constitutions of commercial companies. It is more difficult to justify charging for time spent as a trustee than for time spent acting in a specific matter. It is not safe to assume that there will be authority to charge, even for specific professional services. It may be difficult to make amendments to the company's constitution as Charity Commission approval is likely to be required. AM