Gatekeepers: The Professions and Corporate Governance
John C. Coffee, Jr. (Oxford University Press, 2006)
While much debate has focused on the recent performance of the board of directors, little attention has been given to the role of those professionals who inform and advise the board. These gatekeeping professions - auditors, securities lawyers, securities analysts, investment bankers, and others - are essential to effective corporate governance, and Prof. Coffee argues that even the best of boards are necessarily prisoners of their gatekeepers. Yet, in the recent epidemic of financial irregularity that produced Enron, WorldCom, and other scandals, gatekeepers essentially failed their boards. The watchdog did not bark in the night.
In this volume, based on Prof. Coffee's 2006 Clarendon Lectures delivered at Oxford, he explains the forces that caused "gatekeeper failure." Devoting a chapter to each of the principal professions, he traces their development in the 20th century (and earlier) and focuses on the pressures that have constrained them and shifted the balance of power from professionals to corporate management. Professionals are trusted by investors, he explains, because they implicitly pledge a reputational capital, which they have developed over many years and many clients, to give credibility to the representations of their corporate client. Yet, under certain market conditions, professionals can lose the incentive to protect their reputational capital or to compete based on it.
Prof. Coffee outlines a variety of strategies that would lead in his view to "gatekeeper empowerment." Professions serve investors the most faithfully, he argues, when the investor, rather than the corporate manager, is their client. To this end, he discusses means to re-engineer the relationship between the professional and the investor (or proxies for the investor). Also, extreme market concentration may make market discipline ineffective and force us to rely on liability rules. Tradeoffs exist, however, because liability rules induce professions to govern themselves by rules, rather than by standards. Each gatekeeping profession presents distinctive problems, and no single lever of social control works best in all cases.
The book's themes and the tradeoffs that it poses will be the focus of a conference sponsored by the Columbia Center on Corporate Governance, which will be held at Columbia Law School on September 29.