Do Lawyers Make Good Gatekeepers?
in The Cambridge Handbook of Investor Protection, edited by Arthur Laby (Cambridge University Press, forthcoming 2021)
60 Pages Posted: 21 Jun 2021
Date Written: June 16, 2021
This Chapter, which will appear in The Cambridge Handbook of Investor Protection, ed. Arthur Laby (Cambridge University Press, 2021), argues that there is a strong case for imposing gatekeeping duties on lawyers and reviews the growing body of empirical studies in the accounting and finance journals that partially illumine whether lawyers will act in ways that ultimately inhibit managerial malfeasance and benefit public investors. This Chapter briefly describes the traditional gatekeeping theory, the key elements of a gatekeeper enforcement strategy, and the principal attributes commonly ascribed to gatekeepers. It explains why the designation of lawyers as gatekeepers has been so controversial and argues that the case for imposing gatekeeping obligations on both outside and in-house lawyers is strong in light of the economies of scope that can be exploited from adding gatekeeping to the tasks that lawyers already perform for their clients. It then specifically addresses the potential efficacy of in-house lawyers as gatekeepers.
On the issue of whether lawyers make effective gatekeepers, this Chapter finds that the empirical evidence is both complex and mixed, but that the weight of the evidence generally supports that general counsel are effective (albeit conflicted) gatekeepers, who appear willing to police material illegalities but who also tolerate a good deal of aggressive and perhaps unethical conduct. The more limited evidence about outside lawyers suggests that they may be less likely to press their client representatives to comply with the law, opting instead to perform their strictly advisory role as neutral risk-assessors. Nonetheless, their involvement in disclosure matters appears to generate some salutary, longer term effects, demonstrating perhaps a net benefit to public investors.
Finally, this Chapter reviews the findings of one study, which highlighted the promising gatekeeping potential of board members with legal backgrounds. It raises the possibility that appointing lawyers to the board may offer the best strategy for promoting compliance within the firm and deterring corporate malfeasance. It calls for further research to be conducted on the efficacy of these understudied legal gatekeepers.
Keywords: Lawyers, legal profession, gatekeepers, Sarbanes-Oxley, material violations, economies of scope, proprietary knowhow, Securities & Exchange Commission
Suggested Citation: Suggested Citation