Corporate governance - Lawyers bag the riches

No one much cares for lawyers. Yet, of all the professions, they earn the
highest fees, take home the fattest remuneration packages and have increasingly
bound their influence over business with inextricable links. If the corporate
world feels that it is faltering, it is because it finds itself in a
three-legged race with the lawyers strapped alongside.

Business decisions, once the responsibility of directors with some sage
advice from their accountants, are now in the hands of lawyers. It is the growth
in a formal regulatory system which has done this, and the lawyers, not
surprisingly, have fuelled that growth.

This is not new in the US; no one in American business does anything without
a lawyer placing their thumbprint, and a fat fee, on a business decision. But it
is new in Europe. Previously, it was the accountants who advised, and they were
usually on the side of business. Now the lawyers have applied all their fingers
to the stranglehold.

Businesses have tended to go along with this as it appears to provide them
with the security that boards of directors so desperately desire. As wave after
wave of regulation has rolled in they have accepted, and paid heavily for, wave
after wave of carefully crafted caveats provided by the law firms.

But now they are beginning to understand the awful consequences of this. You
only need to look at the recent report from KPMG, The Pressure of Regulation
on Business, to see what is at stake. One of the people interviewed for the
report was John Coombe, until recently chief financial officer at pharmaceutical
giant GlaxoSmithKline.

He talks of the effect of Sarbanes-Oxley specifically, but of regulation
generally. “It is driven”, he said, “by the need to be seen to have done things.
There is a pressure for people to dot ‘i’s and cross ‘t’s. There is the need to
satisfy the US legal system. And business becomes more risk-averse. People will
decide it’s just not worth taking risks. People will be much more cautious about
going onto boards. People are going into private equity and hedge funds. The
really good people are not necessarily staying in regulated businesses and it’s
all down to the documentation and the personal liability.”

But the fundamental problem is the way that the lawyers have engineered the
situation to place themselves in an unassailable position of controlling the
market and raking in the fees. “It is making money for the lawyers,” says
Coombe, “and it is all paid for by the consumer. The lawyers sit on either one
side or the other saying ‘we ought to go for them’ or ‘you need my help’. It is
a huge extension of the lawyers’ work.”

He also felt that this, inevitably, damaged the work of the accountancy
firms, traditionally the factor which balanced out the influence of lawyers. “It
is reducing the amount of business for auditors,” he said. “They are having to
focus on audit and the rest of the business is beginning to drift away. That’s a
bad thing because it is the auditors who understand the principle-driven purpose
of business.”

He provided another example. “Tax work, for example, is going elsewhere and,
surprise, surprise, it is the lawyers who are picking it up.”

Coombe is not alone in his opinion, nor is it peculiar to the UK. Across
Europe, the corporate sector is also realising the enormous cuckoo it has
unwittingly allowed into its nest. In the same KPMG report, Robert Koethner,
vice president for accounting, planning and reporting, and chief accounting
officer at DaimlerChrysler, points out that: “The law firms have turned the
governance regulations into a job-creation scheme.”

The hugely influential Jaap Winter, himself a partner with the Dutch law
firm, De Brauw Blackstone, and one-time chair of the EU High Level Group of
Company Law Experts, expresses deep disquiet. His warning about the legal
profession was this: “There is a huge risk that they will tend to take corporate
governance codes as rules rather than best practice recommendations. They will
suggest the rules are more legalistic than they should. Lawyers are accustomed
to rules.”

And that is the problem. Lawyers are taking control of the market by
spreading fear. Financial directors everywhere need to be brave, otherwise they
will lose access to good impartial advice. And the fees they pay to lawyers will
continue to rocket.

Robert Bruce is a leading commentator on accountancy issues and the
author of The Pressure of Regulation on Business, available at
www.kpmg.co.uk