Does serving on an outside board of directors create risks for attorneys?

Practitioners have long recognized the benefits of serving on an outside organization’s board of directors. Attorneys may serve in these roles to develop business skills and relationships, support a cause of personal interest, or engage in their community. Outside organizations may even seek attorneys to serve on their boards to gain judgment in complex situations or for their connections within the business community.

While nothing is inherently unethical about attorneys serving on boards of directors, such service may present risks for the attorney and his or her law firm. Consider, for example, an attorney serving on the board of directors for an organization advocating for an overhaul of a municipality’s corporate tax structure. Those advocacy efforts could pursue measures that other companies in the community oppose, including some clients of the attorney’s law firm. The attorney may then receive a call from firm management, saying that a client is enraged that “their” law firm is pushing the tax initiative.

The attorney’s service in this situation would not necessarily constitute a legal conflict of interest. But it could be a source of frustration for the attorney, the law firm, and clients. Here are some tips attorneys may consider to avoid potential risks to ensure that attorneys and law firms are protected while enjoying the benefits of board membership.

Evaluate possible conflicts of interest

Many attorneys considering board service will review whether their affiliation with a board could create a potential conflict of interest, regardless of whether there is an attorney-client relationship between the attorney and the organization. That is because Rule 1.7(b) of the California Rules of Professional Conduct provides that “[a] lawyer shall not … represent a client if there is a significant risk the lawyer’s representation of the client will be materially limited by the lawyer’s responsibilities to or relationships with … a third person, or by the lawyer’s own interests.” As a result, the attorney’s service on the board may result in unexpected allegations of potential conflicts of interest or business conflicts, even if the organization is not a client of the attorney or firm.

Some law firms require their attorneys to obtain firm approval before any board membership service and retain the right to revoke approval. Although the rules of professional conduct may not require such a policy, this “check-with-me” system would allow law firms to evaluate the pros and cons of the attorney’s service on the board from a client service or even a public relations perspective. The policy could vary depending on whether the entity is a law firm client, a for-profit enterprise, or a non-profit organization. Identifying the attorney’s relationship with the organization in the firm’s conflicts clearance database may also help avoid potential conflicts with current or future clients.

Consider branding and the potential consequences of firm association

Law firms may also consider the above policy because when an attorney serves on the board of an outside organization, that attorney’s law firm could be viewed as supporting or having an association with the organization. Regardless of the true nature of the relationship between an attorney and the board, members of the public could draw this inference if, for example, the outside organization uses the firm’s logo or branding to identify its board members. Although it may be commonplace to identify the board member’s association with their law firm on the organization’s website, law firms may consider limiting the use of the firm’s name or logo, especially when it comes to organizations that have viewpoints on specific issues on which the law firm has not otherwise commented (or that are contrary to the firm’s or its client’s interests).

Clarify the attorney’s rule at the start

It is common for attorneys on boards to serve only in their capacity as board members, that is, not as lawyers counseling the board on legal issues or providing legal advice. However, this can create some tension. Lawyers may feel tempted to provide advice on the legal implications of a particular business decision under consideration. On the flip side, other board members may solicit the attorney’s opinion on the legality of the organization’s plans. Such temptations can create risk because it can become difficult to distinguish whether an attorney is simply acting as a board member or providing legal services to the organization in the context of an attorney-client relationship. Thus, at the outset, it may be helpful for the attorney acting as a board member to clarify whether they are acting as counsel to the board or simply as a board member with a law degree.

The distinction in the attorney’s role is important for liability purposes and potential insurance coverage issues. It also impacts whether the attorney-client privilege applies. Other board members may assume that communications with the attorney board member are automatically protected by the attorney-client privilege, which may not be the case.

For these reasons, attorneys can consider confirming with the organization that the attorney is simply acting as another board member at the beginning of the attorney’s board membership. To do so, the attorney can explain to the outside organization that he or she will act solely in a business capacity and, as a result, no attorney-client relationship exists between the law firm and the organization and no communications with the attorney will be protected by the attorney-client privilege. It can also be helpful to confirm at the outset any other details bearing on the attorney’s role with the organization that could, if left unresolved, potentially lead to a later misunderstanding or dispute, such as whether compensation is paid to the attorney or the attorney’s law firm.

If legal issues arise, the attorney may find it helpful to remind board members that the attorney is acting solely in a business capacity. The attorney may recommend that the organization retain outside counsel, where practicable.

Insurance coverage considerations

There could be complications with professional liability insurance when an attorney is acting as a board member and not as legal counsel. Generally, such insurance covers claims against the attorney or firm arising from the attorney’s work as a professional with their firm. If a claim is made arising out of the attorney’s conduct as a board member, insurance coverage questions could become complicated. For example, the organization’s directors and officers liability insurance carrier may argue that coverage is unavailable because the attorney-board member acted in their capacity as an attorney. In contrast, the attorney’s professional liability insurer may argue that coverage is precluded due to the attorney’s nonlawyer role in the organization.

To avoid any potential insurance coverage gaps or disputes, such issues could be addressed before the attorney serves on the board. Many attorneys in this position will confirm that the organization has adequate directors and officers insurance and appropriate indemnification provisions for board members.