Lawyers working in business have been identified as a key source of non-executive director appointments under proposals set out in the long-awaited Higgs Report published earlier this month.

But while the report opens the way for lawyers to sit at board level, tighter controls on independence mean partners from private practice will find it harder to sit on the board of their clients.

The report, entitled Review of the Role and Effectiveness of Non-executive Directors, was initiated by the Government last year in a bid to prevent an Enron-style corporate collapse in the UK.

In what has been described as some of the most sweeping boardroom reforms for decades, the report's proposals will result in a fundamental shift in power in the boardroom. In future at least half the board members will be required to be independent non-executives. Currently companies are required to have one-third non-executives, independent or not.

The proposals also separate the role of the chairman and chief executive; boost the influence of independent non-executives on the key audit, remuneration and nomination committees and encourage greater communication between the senior independent director and shareholders.

One of the key recommendations, however, is the need to recruit non-executives from a wider pool of candidates and not the list of 'usual suspects' – typically white men nearing the age of retirement.

The report identifies lawyers "used to working in an advisory capacity to business" as a key source of these appointments. It also promotes cross-fertilisation of senior management between corporates (see box below).

Michael Hatchard, M&A partner and head of the UK office of US firm Skadden Arps Slate Meagher & Flom, says this could open the way for general counsel and senior lawyers working in business in the UK to take up non-executive posts.

"Cross-fertilisation of executives is rightly encouraged in the report and would be well applied by making general counsel available to non-competing companies on a non-executive basis," he says.

A small group of business leaders has been set up to identify 100 individuals from the "non-commercial sector" with the appropriate level of skills and experience to contribute as non-executive directors. They will report to the Trade and Industry secretary in May.

Professor Laura Tyson, dean of the London Business School, will lead the group. Vanni Treves, a consultant at Macfarlanes and chairman of a number of companies including Equitable Life and the London Business School, works with Professor Tyson and says that senior in-house lawyers are key candidates for this
initiative. He encourages any lawyers who are interested, to put themselves forward for the role.*

"General counsel have a lot of the skills in demand for the new breed of non-executive director.
Particularly if they are also company secretary and sit in attendance at board meetings," Treves says. "There appears to be no reason why they should not be non-executive directors elsewhere."

But for law firms the practice of taking up a seat on a client board as an independent non-executive is likely to be firmly rooted in the past.

The report recommends a definition of independence that excludes anyone who has had a material business relationship with the
company "either directly or through a partner" in the past three years.

Eversheds corporate partner Neil Matthews says: "While on the one hand the report encourages a widening of the pool for non-executives which could open the door to lawyers, on the other it places restrictions which in practice mean lawyers will not be able to sit on client boards."

Margaret Coltman, a corporate finance partner at Norton Rose, agrees. She says: "For lawyers to sit as non-executives while their firms receive work from the same company would, I think, be heavily questioned under the Higgs' proposals."

The issue of whether law firm partners should sit on client boards is a thorny one. Michael
Cassidy, a partner at City firm DJ Freeman, came under fire from British Land shareholders last July when one-third voted to oppose his reappointment as an independent non-executive, claiming that his independence was compromised. His previous firm, Maxwell Batley, was paid £190,000 in fees the year before by British Land. DJ Freeman, also a British Land adviser, hired Cassidy in July 2002.

Cassidy, who remains on the British Land board, has hit out at this criticism in the past, arguing that there is a clear role for lawyers on the board. He says he is not surprised the definition has been tightened, adding that whether or not partners can sit on the board will come down to the definition of "material" interest.

A bonus to prospective non-executive directors is the recommendations in relation to insurance and indemnification of directors, says Mark Beattie, a corporate services partner at Beachcroft Wansbroughs. In the current climate, many are discouraged from putting themselves forward for a role which could expose them to massive claims.

"Potential liability can be a significant concern for non-executives," Beattie says. "This is a very important incentive. These provisions confirm the age-old principle that you are innocent until proven guilty."

Victoria Younghusband, a corporate partner at Lawrence Graham and editor of Corporate Governance, warns that the report is "unlikely to be greeted universally with applause".

"Companies are going to have to take a long hard look at the composition of their board and the ways in which they operate," she says. "I would expect that most boards, even those that are pioneers in corporate governance, will have to bring in changes."

* General counsel who are interested in putting themselves forward should contact Professor Tyson at the London Business School, Regents Park NW1 or write directly to chair of the London Business School, Vanni Treves at the same address.