Gatekeepers: The Professions and Corporate Governance

John C Coffee Jr, Oxford University Press, 2006, 389 pages, £18.99.

Gatekeepers by Columbia University Law Professor John C Coffee Jr, casts a wide net in interpreting recent and ongoing problems in modern corporate governance through his examination of the role that key professions play in facilitating the access of companies to public capital markets – and ultimately into our own pension funds and investment portfolios. Coffee focuses on four professions – auditors, corporate attorneys, securities analysts and rating agencies – labelling these professions as ‘gatekeepers’, given their important roles in using their professional reputations to provide the foundation of trust essential for the operation of a robust and efficient capital market economy.

Coffee’s main premise is that the "crescendo of financial irregularities" (his phrase) in the early part of the current decade, particularly the headline scandals in the US, can in part be attributed to what he calls the "failure of the gatekeepers". He cites a number of specific cases to explore how sometimes conflicted business models or competitive structures in the targeted professions might compromise the objectivity and quality of professional services provided. The accounting profession receives the greatest scrutiny in this book – not surprisingly, given Arthur Andersen’s fateful linkage with Enron and the spectacular professional failure that ensued. But all four professions are given a thoughtful and well-researched review with regard to the role that they play in the overall process of corporate governance and the potential vulnerabilities or conflicts that might exist. Coffee concludes the book by outlining a range of potential solutions or new models to address the challenges identified in his diagnosis, with a view to making these professional services more independent, more principles-based and less conflicted.

This book is a stimulating and important contribution to the corporate governance literature. Coffee not only provides considerable insight into the impact and challenges of these four professions, but in so doing he is also making clear the even broader point that the current corporate governance environment is a complex and pluralistic web of many different actors – not just a simple question of the classic Berle Means agency relationship between shareholders, the board, and management.

However, by excluding consideration of the role of the institutional investor Coffee may not have cast the net widely enough. Institutional investors are also professionals, inasmuch as many are acting as agents of their end-beneficiaries – and therefore can also be regarded as gatekeepers to retail investors and pension funds. The institutional investment profession has its own conflicts and weaknesses (including short-termism and free riding), which also can be viewed as contributing to the broader stew of corporate governance problems in the US. An opportunity was missed by Coffee to examine the role of institutional investors as another form of gatekeeper.

Altogether, this is a scholarly book, rigorously researched and footnoted. Its argumentation is lucid and its style is clear – very accessible for non-academic readers with an interest in this subject.

George Dallas

Standard & Poor’s