This is Part III of my series, exploring the reasons why lawyers acquiesce in their clients’ frauds and other misconduct. For background, please access Part I and Part II of this series. In Part II, I had focused mainly on the in-house lawyer and argued that the in-house lawyer is a mere employee to her business superiors in her company and, therefore, will be inclined to countenance the unethical actions of the CEO, CFO, etc. But, in this segment, I will focus on lawyers generally—both in-house and outside lawyers.
Don’t think this is an issue? Consider just a few of the many high-profile events in the past year, as we reminisce about 2007:
o SEC Sues Apple General Counsel Nancy Heinen. Remember the over hundred companies under investigation for backdating stock options? In April 2007, the Securities and Exchange Commission sued Apple General Counsel Nancy Heinen, claiming that she “caused Apple” to backdate two large option grants to senior executives and that she altered company records to conceal the fraud. Of course, she’s innocent until proven guilty.
o Monster Worldwide General Counsel Myron Olesnyckyj Pleads Guilty. In February 2007, Myron admitted that he and others at Monster Worldwide, Inc. prepared grant paperwork with altered dates, changed the names of grant recipients and the number of options granted, and provided false information to Monster’s auditors.
o Jury Convicts Hollinger General Counsel Mark Kipnis. In July, after a seven-week trial in Chicago, a jury convicted Mark Kipnis on three counts of mail fraud in connection with a scheme by Hollinger ex-CEO Conrad Black to secretly skim $60 million from sale of the company’s newspapers. Although Kipnis was not a beneficiary of the hidden payments, the jury believed that he played a crucial role in structuring the fraudulent deals.
And outside counsel also faced their own problems, which I will not recount here.
Alignment pressures of Faithful Agents. It is banal to say that lawyers are “faithful agents” of their clients. This agency relationship is another crucial feature of the ethical ecology of lawyers. Like all agents, the lawyer has to justify her behavior to her clients, which creates pressures to align her views with her client’s.These alignment pressures are powerful psychological forces and can distort the lawyer’s judgments. How warped her judgments are depends on how closely aligned she feels with her client.
Who is the Client? As a threshold matter, we should be clear who the client is. Formally, the client is the organization, not its “constituents,” such as the Board of Directors, the entity’s other employees, or even the shareholders. Of course, the organization is entirely fictitious and can only act through the flesh and blood of its constituents. Therefore, in actual practice, the lawyer must suspend this fiction and interact with senior management (who are vested with the authority to direct her activities) as her de facto client or principal, although they are merely and legally co-agents. This explains why both outside and inside lawyers often, if not always, refer to and think of these co-agents as “clients.” (There is one little complication which I will gloss over for purposes of this blog entry: for the outside lawyer, the de facto client is often the inside lawyer whose de facto client, in turn, is the senior manager.) Interestingly and without going into great detail here, the American Bar Association’s Model Rules of Professional Conduct strongly support the identification of senior managers as the lawyer’s de facto clients.Also, with the exception of independent counsel to the Board of Directors, all lawyers report, either directly or indirectly, to these senior managers. This mismatch between the beneficiary of the lawyer’s fiduciary duty (the corporation) and the beneficiary of the lawyer’s reporting duty (management) is inherently problematic for the state of professional norms. Putting it bluntly, the lawyer faces an obvious conflict of interest when the senior manager, who acts as the lawyer’s de facto client, asks that lawyer to do something that goes against the interest of the de jure client—the corporate entity to whom the lawyer owes a fiduciary duty.
Auditing vignettes study. How strong are these alignment pressures experienced by faithful agents? Consider recent research on the impact of roles on the judgments of professional auditors. Researchers Don Moore, George Loewenstein, Lloyd Tanlu and Max Bazerman surveyed 139 auditors employed full time by one of the Big Four U.S. accounting firms. Each participant was given five intentionally ambiguous auditing vignettes and asked to judge the accounting for each.Half the participants were asked to assume that they had been retained by the firm they were auditing; the rest were asked to assume that they had been retained by an outside investor which was considering investing money in the firm. The firm’s unaudited financial statements needed to be evaluated by all participants.
For all five vignettes, the auditors were on average 30% more likely to find that the accounting behind a company’s financial reports complied with GAAP if they were playing the role of auditor for that firm (as opposed to representing the potential investor), demonstrating substantial bias in auditors’ judgments when asked to suppose a hypothetical role with a client. If a mere hypothetical relationship with a client could generate such great distortions in auditing judgment, one can only imagine the degree of distortion that might exist in a longstanding relationship between a lawyer (acting in her capacity as zealous advocate) and her de facto client.
Accountability. Why were the judgments of the firm’s auditors so grossly distorted in the direction of their client? The authors of the auditing vignettes study explain these results by focusing on the mechanism of “accountability” in the agent-principal relationship. Accountability – having to justify one’s views to others – is at the crux of the relationship. Agents are, by definition, accountable to their principals; they must justify their actions and views to their principals.Accountants and lawyers as agents must justify their views and decisions to management in terms that management understands and values.
Accountability can thus produce a chameleon-like shift in behavior in the principal’s direction. Other studies have demonstrated that even a weak form of accountability between strangers can bias subjects in adopting public positions that are more closely aligned with the preferences of those to whom they are accountable. If we know we are speaking before a bunch of liberals, we perform more liberal-talk; in front of conservatives, we talk conservative.
If you read current news reports about the ongoing presidential campaigns, notice how well the presidential candidates tailor their messages to their audiences.In the December 17, 2007 issue of The Wall Street Journal, I read that Republican presidential candidate Mike Huckabee emphasizes his views opposing abortion and same-sex marriage in Iowa, while in New Hampshire he doesn’t bring up abortion, marriage or religion unless specifically asked about it. Of course, Huckabee is not alone and most of the tailoring done by presidential hopefuls is conscious and strategic, based on careful focus-group analyses. My less obvious and perhaps more controversial point here is that we also tend to tailor our messages and actions to our respective audiences unconsciously as well. I do suspect that some are naturally more adept at unconscious tailoring or “tuning” than others.
Accountability may produce an even deeper alignment. In a follow-up study, Moore, et. al. found that role manipulation, i.e., whether the subject worked as “auditor” for either the seller or buyer, had a significant effect in aligning private beliefs about the client’s accounting in the direction of their hypothetical client.In other words, affiliated agents tend to automatically adopt the principal’s perspective of the world, a “partisan point of view.” Moreover, once the agent adopts a partisan affiliation with the principal, “it can be difficult, if not impossible, to undo that encoding or to retrieve unbiased information from memory.”
Strength of accountability. As explained above, an agent’s accountability to her principal produces alignment. It is reasonable to suppose that the stronger the accountability, for whatever reasons, the greater the alignment. What accounts for the strength of accountability? There are multiple binding factors that determine the strength of the agency relationship. For example, stark financial ties to the principal will increase accountability to the principal. Evidence now suggests that social ties also have that effect. Given the day-to-day social interaction between management and inside counsel, this is another reason why accountability to management should be strong. For outside lawyers, the repeat business to be expected from their corporate client’s senior managers likewise should produce strong alignment pressures. Just think about the following developments in the past few decades and their possible effect on the alignment of law firm partners with their clients: eat-what-you kill compensation schemes and the erosion of lock-step seniority system, the increased competition in the market for legal services, beauty contests for legal services, etc. I detail the effects of these and other developments in my article, Gatekeepers Inside Out, which is forthcoming in The Georgetown Journal of Legal Ethics.
Lawyer as Moral Extension of Client. In addition, the characteristic activities of lawyering may also contribute to the strength of accountability to the de facto client. As Professor Gerald Postema argues, unlike the physician or auto mechanic, the lawyer “act[s] in the place of the client, [which] require[s] the direct involvement of the lawyer’s moral faculties — i.e., his capacities to deliberate, reason, argue, and act in the public arena.” As the client’s agent, the lawyer speaks on behalf of the client and enters into relationships with others in the name of the client. What the lawyer does is typically attributable to the client. As Postema notes, “Thus, at the invitation of the client, the lawyer becomes an extension of the legal, and to an extent the moral, personality of the client.” Consistently acting out behavior may have far-reaching consequences. Thus, it is entirely plausible, as the great Karl Llewellyn suggested decades ago, that the most powerful determinant of attitudes and social orientation of lawyers is the work they do.
In my upcoming Part IV, I will argue that lawyers’ special status as lawyers will contribute to these alignment pressures. For a more thorough treatment of this topic, please read my more comprehensive works, The Banality of Fraud: Re-Situating the Inside Counsel as Gatekeeper and Gatekeepers Inside Out.