The chairman of the board of a Securities and Exchange Commission (SEC) issuer recently told me that his company pays an annual $150,000 retainer to outside legal counsel to attend its audit committee meetings. He explained that this outside legal counsel attends every meeting as a matter of course, not because the committee is dealing with any specific legal issue. The chairman wondered if this expense was really necessary or required. Good question.

In 1999, the influential Blue Ribbon Committee on Improving the Effectiveness of Corporate Audit Committees issued a report and recommendations. The committee—11 members drawn from the business, financial and accounting communities—was established in September 1998 by the New York Stock Exchange (NYSE) and the National Association of Securities Dealers (NASD) to make recommendations on strengthening the role of audit committees in overseeing the corporate financial reporting process.

One recommendation advised that when circumstances dictate, “management should help the audit committee retain independent legal counsel.” It also included several sample audit committee charters. These included references to retaining independent counsel to help with investigations into matters within the audit committee’s scope of responsibilities.

Following release of the report, the stock exchanges and the SEC adopted several reforms focused on the role and independence of audit committees. Among other things, registered companies were required to adopt audit committee charters, and many nonregistered companies did the same just as smart governance policy. Today’s charters often call for independent legal counsel for the audit committee. 

With the emphasis on audit committee independence, it’s no surprise that an audit committee may, at times, need to turn to outside legal counsel rather than relying on corporate counsel. But this need usually arises in extreme situations, such as when dealing with management fraud, shareholder accusations of impropriety or regulatory complaints related to the board. Is it necessary to keep independent counsel on retainer and involve them in routine meetings? I find it hard to see the value of having independent counsel on retainer to attend regularly scheduled meetings. Absent specific ongoing issues, it would be difficult to justify the high costs of doing so. I’d like your feedback on this.

• Has your audit committee ever engaged independent counsel?
• Do you keep counsel on retainer?
• What is the counsel’s level of participation in audit committee governance?

I look forward to reading your responses in the comments below.