I used to think critics should keep their hands as clean as possible, but living in the UK for a couple of years really challenged my point of view on this issue. The critical culture over there is quite different, dating back to Bernard Shaw, who straddled the critic/artist divide, and newspapers seem less worried about pure objectivity - a fairly mythical concept anyway.
As one who's made the leap myself, both in NY and L.A., I do make a point of recusing myself from the work of close friends and/or people with whom I've worked in direct professional relationships (a play by Brian Parks, my assigning editor at the Village Voice, and a recent production at the Metropolitan Theatre, where I did the music for The Devil and Tom Walker last spring, are just two instances of shows I've chosen to opt out of reviewing). Most critics in the U.S. wouldn't go as far as I have, but check out the Brits' idea of fair game:
In recent years, Mail on Sunday critic Georgina Brown sat on the board of the Bristol Old Vic, but still reviewed shows there, and Evening Standard critic and alleged snoozer Nicholas de Jongh's play Plague Over England opened at the Finborough theatre. These are a couple of exceptional examples of potential conflicts of interest, but then there are the regular, everyday ones of critics hired to write program notes or paid by theatres to host post-show talkbacks.
Personally, I judge these issues on a case-by-case basis—and I do try to keep the cases to a minimum. For instance, some critics and editors don't think a reporter who's written a feature on a show—i.e., met and spoken to artists involved in a given production—ought to then put on his critic's hat and review the same show; others, like The New Yorker's John Lahr, often do both in the same story. Speaking for myself, I wouldn't have a freelance career to speak of if I couldn't transgress that line on occasion. For me, the important line-crossing questions are: Have I sought work as a composer or dramaturg (the two things for which I've received credits in New York) from the same artists I've reviewed? Have I—a bit thornier, this—ever reviewed the work of artists from whom I've sought employment? The truth is, not that I recall—and I think I'd recall.
I often feel that this dance can't go on forever—that eventually push will come to shove, and my two worlds will start to overlap too incestuously—but so far this balancing act has proven sustainable, and perhaps more importantly, it's kept me alert and interested in this mutable art form. I can't say it's made me a better critic, but it's made me a more engaged critic and observer.