Why Bank Counsel Should Not Serve on the Board of Directors

For many years, I have written articles and presented seminars that addressed why legal counsel should not be a member of the board of directors of a financial institution. Before all of the lawyers reading this article start jumping up and down, let me lay several facts on the table:

1. As

2. A financial institution should have competent bank counsel to assist at board meetings or whenever legal assistance is needed.

3. It is my belief that members of the board of directors should include attorneys. Phrased alternatively, attorneys should be considered as strong candidates for directors.

4. However I do not believe that an attorney on the board of directors should also serve as counsel for the bank.

The reason for my opinion is simple: Under certain circumstances, bank counsel may be in conflict of interest between his or her positions as bank counsel and as a member of the board of directors. For example, as bank counsel, most work done by bank counsel is privileged. Any questions concerning the behavior of the bank counsel in terms of advice to the board of directors, individuals on the board of directors or to the management of the bank and staff would be considered attorney-client privilege - thus not available for scrutiny.

On the other hand, when the bank's counsel is also a member of the board of directors and does not wear his or her bank counsel hat, the counsel is simply a member of the board and does not have any attorney privilege. Any director, including the bank counsel director, is subject to the duties and responsibilities of a board member. Bank counsel directors can be held as liable as any other director for possible criminal and/or civil liability.

Bank-counsel directors may have the same affirmative defenses as board members, but they do not have attorney-client privilege as members of the board of directors. They can utilize the affirmative defense that they have relied upon the advice of bank counsel, or whatever evidentiary weight this advice generates. However it becomes ludicrous when a director claims to be relying upon bank counsel's advice ... when that director is the bank counsel!

Thus, I am not in favor of placing bank counsel on the board of directors. Bank counsel should be in attendance at board meetings whenever needed, they should be paid professional compensation for their services, and their talents utilized to mitigate your liabilities as board members. At the same time, locate and retain excellent individuals who just happen to be professional attorneys. But they should not be attorneys who work on behalf of your financial institution.

Having made those statements why bring up the subject?

Recently I reviewed the deposition of an attorney who is a bank director. The following is a sanitized portion of the testimony that demonstrates the problem that could rear its ugly head if bank counsel is also a board member, or vice verse.

To set the scene, a plaintiff attorney is asking the witness, who is the bank's counsel/board member and who is an attorney representing the bank as well as the individual. The plaintiff attorney is trying to discover what the director knows about a particular situation and, as the exchange unfolds, you will see how each role collapses into the other.

Plaintiff's attorney: "Why then, sir, did you approve this loan?"

Defendant's attorney: "Objection. That is the question that we had an attorney-client issue with."

Plaintiff's attorney: "Did you render legal advice to the 'bank' in relation to the loan to the customer?"

Witness: "Attorney-client privilege. I'm not going to answer that."

Plaintiff's attorney: "You can say 'yes' or 'no,' whether or not you've rendered legal advice to the bank in connection with this loan to the client."

Defendant's attorney: "Objection. Under the state law of attorney-client privilege, you cannot give the subject matter of that matter without waiving the privilege. Therefore the witness cannot answer that question."

Plaintiff's attorney: "Sir, as a director and solely in your capacity as a director, and not as the bank's lawyer, why did you approve, as a director, the loan to the customer?"

Defendant's attorney: "Objection."

Witness: "I can't answer that ... attorney-client privilege. There is no way to separate the answer as an attorney or as a director."

Bank counsel can get caught in the crosshairs of investigations if they are also members of the board of directors. Potential and actual conflicts of interest can be eliminated if the bank's counsel is not a member of the board of directors. You do not have to eliminate attorneys from serving on the board, as long as they are not the legal counsel for the bank.

Utilize the advantages of both situations with the disadvantages of none. Those best practices will provide the financial institution competent directors without conflicts of interest.