Gatekeepers by John Coffee is an Excellent Explanation of the Role of Professional Advisors to Major Public Companies
Just finished reading my old law professor John Coffee’s book “Gatekeepers: The Role of the Professions and Corporate Governance.” (1) It was perhaps one of the more illuminating books I’ve read in a long time.
If I had to reduce it to a simple thesis it would be this: law firms, accountants, auditors, credit rating agencies, and consultants, among others, play a role in public companies’ corporate governance and decisions by lending their reputations and vouching for companies–up and until other incentives make it worthwhile to risk that capital. These professions have “reputation capital” that they lend–or rather, sell–to their client businesses, in order to vouch for the company whether to a government agency, to the investing public, or to shareholders themselves.
Professor Coffee puts good stock in the idea that these professions won’t risk their reputation capital because, without it, they have nothing else to sell. I’m not so sure, however. The recession saw a major breakdown in reputation capital protection. And to whom does the reputation capital really belong? If a law firm like Jenkins & Gilchrist implodes due to scandal, does that mean every lawyer is stained, or should be and therefore would be incentivized to avoid overtly risky behavior?
The book pinpoints how things “generally” work, I agree. And it does so in a very enlightening way, which I appreciate. I just think that more needs to be said about financial incentives to individuals who can externalize the full cost of the risks they take to their branded employers. They can just quit or go somewhere else. Furthermore, securities class actions generally cannot go after these professions when they contribute to investor fraud. Thus, the risk of losing one’s reputation is probably not as great as one might theorize.