By Adam Liptak, the national legal correspondent for The New York Times
Professor John C. Coffee, Jr., has a disc jockey’s voice and a mischievous wit. In his famous “white collar crime” seminar, he uses these gifts to teach his students something beyond codes, case holdings, and a healthy fear of the S.E.C.
The Adolf A. Berle Professor of Law and the director of the Center on Corporate Governance, Prof. Coffee is at ease in many disciplines. His academic work is informed by continuing participation in live legal cases. He is superhumanly prolific. And he is regularly cited by the courts and quoted in the press.
In Gatekeepers: The Professions and Corporate Governance, his powerfully fresh new book on the failures of lawyers and other professionals to prevent the recent financial scandals, Prof. Coffee demonstrates that, in the end and on the whole, a great deal can be explained by what economists call incentives and what novelists call human frailty.
“An epidemic of corporate and financial irregularity crested in the United States in 2002,” Prof. Coffee writes in Gatekeepers. The scandals prompted calls for corporate-governance reforms, mainly focused on boards of directors.
But Prof. Coffee would look elsewhere for effective reform. “Most of what can conceivably be done to make the board more active and independent has already been done,” he writes.
“The board of directors is the prisoner of its gatekeepers,” he says. “They’re only going to wake up and recognize there’s a problem if a professional alerts them. I think a strong, good lawyer telling a board that something illegal has happened, and they have responsibility, will activate them because they are risk-averse.”
But the gatekeepers – the lawyer giving advice, the investment banker writing a fairness opinion, the securities analyst circulating a report, the credit agency rating a security – are often subject to dual or conflicting loyalties.
In both the Enron and WorldCom scandals, the professional watchdogs meant to ensure the integrity of the companies’ conduct and disclosures failed. The key mystery, Prof. Coffee writes, is this: “Why did the watchdogs not bark?”
The main answer is conflicts of interest. “Typically the party paying the gatekeeper will be the party that the gatekeeper is expected to monitor.”