May 6, 2011 1:05 PM

Munger Tolles's Ron Olson and Berkshire:
The Question of Lawyers Serving on Client Boards

Posted by Amy Kolz

It's been a busy month for Munger, Tolles & Olson name partner Ronald Olson. 

Berkshire Hathaway, a longtime Olson client, has faced a swelling tide of scrutiny surrounding the stock trading of David Sokol, a former top lieutenant to CEO Warren Buffett who abruptly resigned in late March. Sokol purchased a $10 million stake in Lubrizol Corp. around the same time he allegedly pitched the specialty chemicals company as a potential acquisition for Berkshire. 

In recent weeks, Olson and his firm assisted a Berkshire Hathaway audit committee in preparing an 18-page memo for the board about Sokol’s trading in Lubrizol. Released last Wednesday, the scathing report concluded that Sokol misled Berkshire and violated the company's ethics and insider trading policies. Within hours of the report's release, Olson exchanged sharp words with Sokol's attorney, Dickstein Shapiro partner Barry Wm. Levine, over that report. 

Last weekend, Olson participated in Berkshire's annual shareholder meeting in Omaha. And he's had to see to his responsibilities as a 14-year veteran director of Berkshire's 12-member board. 

All of this work for the famed Oracle of Omaha has raised questions about whether any lawyer, even one as esteemed as Olson, can fairly and neutrally provide independent legal counsel for a corporate client while also serving as a member of the company’s board. And while no one has suggested that Olson has overstepped any ethical lines, the risks and conflicts inherent in his dual role at Berkshire make it an unusual choice for law firm partners today, according to interviews with securities, professional liability and litigation attorneys, along with ethics experts. 

Olson asserts that neither he nor Munger Tolles has ever had a concern about his dual roles, pointing to the integrity of his client. "I am totally confident in my own ability to provide independent legal advice, and I'm totally confident in [Berkshire's] ability to operate at the highest level of integrity, and the two [pieces] give me comfort in playing both roles," Olson says. (Olson also serves on the boards of other current and former clients; his firm bio lists him as a director of The Washington Post Company, Edison International, City National Corporation, and Western Asset Trusts.)

ABA rules similarly place a good deal of faith in an individual lawyer's judgment and discretion. "The basic rule is that you are allowed to do [both], but the [lawyer-director] has to be very careful and recuse himself from any decision that might implicate the lawyer's own interest," says Barry Temkin, a partner at Mound Cotton Wollan & Greengrass and the chair of the New York County Lawyers' Association Professional Ethics Committee. (The relevant language from the ABA's Model Rules of Professional Conduct is in comment 35 of Model Rule 1.7: "If there is material risk that the dual role will compromise the lawyer's independence of professional judgment, the lawyer should not serve as a director or should cease to act as the corporation's lawyer when conflicts of interest arise.")

But such a dual relationship with a company is rife with potential conflicts and ethical quandaries, both obvious and more ambiguous, say professional liability and ethics lawyers. While it might be relatively easy for a lawyer/board member to sidestep certain obvious conflicts of interest, by say recusing oneself from a vote to retain that director's law firm for a corporate assignment, other conflicts are less simple. How impartial is the lawyer/director's input with respect to the company's merger or on general litigation strategy, for example, given the potential impact on the law firm relationship? 

Beyond the ethical hurdles, there are practical risks and hurdles that lawyer/directors and their clients must grapple with when law firm partners take on a board seat, say lawyers. First, there's the risk of reduced or lost malpractice insurance coverage. Since the S&L crisis in the late 1980s and the ensuing suits against lawyers and law firms involved with corporate boards, malpractice insurance carriers have been skittish about board service, says William Freivogel, a lawyer and independent consultant for law firms on ethics and professional liability. "Today, a lawyer serving on a board of a client may have reduced coverage or no coverage at all," he says. At the same time, the company's director and officers insurance provider could challenge coverage for actions perceived to be part of the lawyer's separate role as a legal service provider.  

There's also a question of whether a lawyer/director has heightened securities law obligations, says Julie Jones, the cohead of the Securities and Public Companies practice at Ropes & Gray. A court could hold a lawyer/director to a higher standard of due diligence in a securities law claim, due to the lawyer's special expertise, says Jones. Meanwhile the corporate client might face a loss of privilege in any future litigation as it can be difficult to differentiate when the lawyer was giving legal advice, and thus covered by privilege, and when he or she was acting as a board member, which is not privileged.  

The upshot of these risks is that while it was once common for lawyers to serve on their client's boards, "today, it's the exception rather than the rule," says Douglas Richmond, a senior vice president in the professional services group of AON Risk Services, a large broker of lawyers' professional liability insurance. Some firms outright forbid the practice, says Richmond. Those firms that allow board memberships are very sensitive to the risks, and often carefully document the relationship to let the company know the differing roles of lawyer and board member.  "If it's being done, it's done very carefully," he says.

It's not a stretch to assume that Buffett and Berkshire Hathaway view Olson and Munger Tolles's long-running history with the company as outweighing the risks that could accompany Olson's board seat. As we've previously reported, Munger Tolles has been Berkshire's go-to law firm ever since founding partner Charles Munger left the law firm to join Buffett in a business partnership in 1965. (Munger is now the vice-chairman of Berkshire.) The law firm's relationship is particularly important because Berkshire does not have a general counsel.

Still, the selection of the firm and Olson to assist the independent audit committee's report on Sokol raised some eyebrows. Olson was named as a board member defendant in a shareholder derivative suit relating to Sokol's trading filed in Delaware Chancery Court in April. And though the audit committee is comprised of independent directors, Olson does not qualify as independent under NYSE listing rules given the $4.68 million in Berkshire legal fees paid to his law firm in 2010, according to a recent proxy.

"It's a little bit unusual because it's hard to be objective [about the evidence] when you're a defendant in a lawsuit even if it's a tangential role and you're [only] accused of not providing sufficiently vigilant oversight," says Francis Pileggi, a litigation partner at Eckert Seamans Cherin & Mellott. 

Olson disagrees with the critics. On the report, he counters that the audit committee memo was simply weighing whether Sokol's conduct measured up to the internal policies of Berkshire. He compared his service to the committee as similar to what a general counsel--also a nonindependent party--might provide at another company.

 

Contact Amy Kolz at [email protected]

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