The Qualified Legal Compliance Committee: Using the Attorney Conduct Rules to Restructure the Board of Directors

93 Pages Posted: 5 Dec 2003

See all articles by Jill E. Fisch

Jill E. Fisch

University of Pennsylvania Law School - Institute for Law and Economics, European Corporate Governance Institute

Caroline M. Gentile

Fordham University School of Law

Abstract

With the adoption of the Sarbanes-Oxley Act of 2002, Congress vested the Securities and Exchange Commission with the authority to promulgate professional standards of conduct for attorneys. The Commission, however, went beyond requiring that attorneys report corporate misconduct "up the ladder" by introducing a new corporate governance structure - the qualified legal compliance committee or QLCC. The QLCC reduces the statutory emphasis on lawyers as gatekeepers in favor of increasing the focus on board structure and director independence.

Although increasing reliance on the board of directors rather than outside gatekeepers to prevent and address corporate misconduct may well be desirable, several components of QLCCs are problematic. The Commission appears to have given little consideration to the potential costs of establishing QLCCs. At the same time, the potential benefits of QLCCs may be overstated. These facts are particularly troubling, because the Commission's rules provide incentives for attorneys to pressure issuers to create QLCCs as a means of reducing the attorney's own liability. Accordingly, issuer decisions to create QLCCs could be influenced more by the market for legal services than the benefits and costs of QLCCs themselves. Finally, the Commission's conception of the ideal corporate governance model is open to question. QLCCs are part of a continuing effort to reduce corporate misconduct by enhancing the monitoring role of the board of directors through a rule-based approach to board structure and director independence. As recent governance scandals demonstrate, this approach is unlikely to produce radical changes in the effectiveness of directors, primarily because rules specifying board structure and director independence do not create adequate incentives for directors to take a more active role in monitoring corporate management.

We conclude by considering ways to address the incentives of directors, including increased director liability, changes to director compensation, and alternative mechanisms for director selection. Although each of these methods is imperfect, collectively they illustrate the limitations of the Commission's approach, which emphasizes board structure without adequately addressing director passivity. The range of options available to improve director incentives and accountability highlights the shortcomings of the Commission's current rulemaking efforts.

Keywords: Directors, attorneys, QLCCs, SEC rules

Suggested Citation

Fisch, Jill E. and Gentile, Caroline M., The Qualified Legal Compliance Committee: Using the Attorney Conduct Rules to Restructure the Board of Directors. Duke Law Journal, Vol. 53, pp. 101-192, November 2003. Available at SSRN: https://ssrn.com/abstract=471302 or http://dx.doi.org/10.2139/ssrn.471302

Jill E. Fisch (Contact Author)

University of Pennsylvania Law School - Institute for Law and Economics, European Corporate Governance Institute ( email )

3501 Sansom Street
Philadelphia, PA 19104
United States
215-746-3454 (Phone)
215-573-2025 (Fax)

Caroline M. Gentile

Fordham University School of Law ( email )

140 West 62nd Street
New York, NY 10023
United States

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