A view from the trenches


The idea that professionalising the financial services sector could somehow improve market integrity is an idea worthy of debate. But, the suggestion that gatekeeper rules ought to apply to a wide sweep of participants in the financial markets is a problematic idea and may miss the point.

Gatekeeper theory might seem like an idea for our times, but as with Coffee’s post-Enron formulations of the idea; it is an idea that has some serious limitations. Would more gatekeepers have helped JP Morgan to better manage risk (and their oversight) or have helped the Centro shareholders?

It seems that everyone from Commonwealth members of parliament to ASIC is looking for a set of rules that will deliver better ethical behaviour by holding individuals to account.  Unfortunately the theory might not deliver the ethical outcome that they seek.  Do we really think a focus on responsibility alone will achieve the right outcome?  The debate thus framed is a bit one dimensional and would benefit from a more integrated approach to risk management as suggested by O’Brien.

It’s too easy to suggest an “indisputable duty of corporate lawyers to act as officers of the legal system” as a reason for corporate lawyers to be characterised as gatekeepers.  To characterise corporate lawyers as gatekeepers is to impose upon them and by analogy financial advisers to an inappropriate standard that does not address the matrix of relationships in which they operate.  As Dubnick recognises these the trusting and accountable relationships which underlie current practices are at the heart of how the system actually works.

The complex relationship between commercial lawyers and their clients and the overwhelming recognition by commercial lawyers of their role as guardians means at least in this jurisdiction there is not a systemic failure as some claim took place in other places during the GFC. 

Corporate lawyers are more usefully thought of as guardians than gatekeepers, they generally operate conscious of our strong ethical obligations and obligations to our clients, the courts of which we are officers and to the community that depends on the strength of our legal and financial institutions. Unlike auditors or security analysts (who have independent duties as objective providers of external assurance) corporate lawyers do not and can not have imposed on them duties to the wider market beyond their general ethical duties.  Corporate lawyers provide advice to the company that is seldom if ever designed to be relied upon anyone outside the company.  Lawyers are fiduciaries of their client who operate within a broader environment and who are governed both by the specific laws and by the grundnorm.

In general terms there are different levels of intensity proposed by the advocates of the corporate lawyer as a gatekeeper.  These range in intensity from nothing to an annual certification obligation:


Up the ladder reporting

Notice of withdrawal obligations

Obligation to report to ASIC

Certification obligations for individual disclosure documents

Annual certification obligations

Unfortunately, the gatekeeper’s exponents fail to adequately account for the economic incentives and cognitive biases that systemically influence the behaviour of market participants like corporate lawyers.  Even beyond the economic incentives, if lawyers were aware of material information of misdeeds (and it is questionable whether they would be aware in such black and white terms) their cognitive bias makes it unreasonable to impose gatekeeper obligations on them.

Advances in behavioural and social psychology have demonstrated that corporate lawyers and financial advisers (like everyone else) are prone to deeply embedded behavioural biases.  People are affected by unconscious biases that can affect the rigour that they bring to the roles expected of them and the accuracy of their judgements.  Because the like the financial adviser, corporate lawyer’s primary audience is their client and because they owe their client fiduciary duties, studies into accountability and audience bias strongly suggest it is simply unrealistic to expect them not to avoid all alignment pressure in the way that we expect of an auditor or analyst.  If we want better outcomes from market participants we need to understand and manage these behavioural biases. 

Corporate lawyers have a professional duty to maintain independence; for corporate lawyers this means:

  • avoiding formal and informal conflicts of interest;
  • remaining independent from government, this is not accepting government policy blindly without regard to the rule of law or specific legislative requirements;
  • being independent from our personal views; and
  • a degree of independence from the client but being independent from our clients is not the kind of independence the community expects from auditors.  For corporate lawyers independence is more complex and multifaceted: at its simplest it requires that we preserve our overriding duties as officers of the court and at its most complex it requires that we are zealous proponents of arguments that we might feel uncomfortable making on our own behalf.

In 1998 Sir Gerard Brennan reminded commercial lawyers that: because the moral purpose of much commercial law is known to commercial lawyers alone, the lawyer becomes by default the moral as well as the legal adviser.  The commercial lawyer’s duty cannot be restricted to legal advice, for then the moral decision – what ought to be done as distinct from what can lawfully be done – will not be addressed.

The corporate lawyers must ensure that our profession has the structural features to permit a degree of commercialism commensurate with meeting the challenges of the growth of national and transnational legal practice without detracting from the underlying essential elements of the goodwill of that “business market” – the faithful administration of justice based on adherence to professional standards and ethics and to the required ethical standard.

Wasserman suggests that it is not hard to articulate what we the ethical standard should be, we can just go back to the “golden rule”.  This is the philosophical maxim common to almost all of the world’s great religions, holds that you should treat others as you would like to be treated (a useful maxim for dealing with everyone from five year old boys upwards).  In many ways this is as simple as asking the question “Am I acting as a good agent?  Am I helping my client to be a good fiduciary for the parties to whom she owes fiduciary duties?  Am I acting as a good agent of my society and the legal, financial and regulatory system?”   How different would the circumstance of James Hardie or Centro have been if those questions had been asked?

Even as a mere “transaction engineer”, the corporate lawyers keeps in mind that they are hired to provide independent and critical judgement.  There is a place for ethics to help the lawyer help our client company, its executives and directors act as a good agents.  That same benchmark can help the securities lawyer be a good member of society and our legal, financial and regulatory system.  In my experience most directors and executives expect their lawyers to act independently, ethically and with integrity but not as a gatekeeper.  Maybe the answer to the question posed by the Oxford Project is not as simple as better rules.

This article originally appeared online at the University of New South Wales' Centre for Law, Markets and Regulations.

The content of this publication is for reference purposes only. It is current at the date of publication. This content does not constitute legal advice and should not be relied upon as such. Legal advice about your specific circumstances should always be obtained before taking any action based on this publication.

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Andrew Lumsden

Partner. Sydney
+61 2 9210 6385