New Realities Of Corporate Governance For In-House Counsel

In-house lawyers need a new job description.

One that recognizes the broader role demanded of the lawyer who represents a corporation in today’s business environment, recognizes the more proactive approach that is required for serving as the company’s lawyer, and one that takes into account issues such as business ethics.

While many of our colleagues have always practiced law this way, the new realities of corporate governance have created what amounts to a new professional standard.

We’ve noticed a substantial number of companies formally appointing their in-house counsel – often the general counsel – the chief ethics officer. Even where the designation is not a formal one, Sarbanes-Oxley has introduced a new dimension to the responsibilities that accompany corporate legal practice.

It has long been the case that lawyers can counsel their clients on “moral, economic, social and political factors.” In fact, the commentary to Rule 2.1 of the Massachusetts Rules of Professional Conduct states: “It is proper for a lawyer to refer to relevant moral and ethical considerations in giving advice. Although a lawyer is not a moral advisor as such, moral and ethical considerations impinge upon most legal questions and may decisively influence how the law will be applied.”

The principle expressed in Rule 2.1 is particularly germane in the corporate governance milieu we see today. And its language precedes the enactment of Sarbanes-Oxley.

Sarbanes-Oxley and the new realities of corporate governance extend beyond just the public, for-profit organization. The principles and evolving best practices that have their genesis in the law represent a benchmark that is relevant also to non-profits, charities, foundations and institutions of higher education. The fact is every organization of any size and complexity benefits from effective governance.

One of the lessons we’ve all learned by now is that aiming for minimal compliance – doing only what the law requires – is sometimes more expensive than doing what is right. The decision whether to adopt voluntarily certain of the governance principles established in Sarbanes-Oxley in the absence of a legal requirement is a decision an organization’s management and trustees must make. They will be influenced by their lawyer’s guidance and should be informed that efforts are now underway in New York and Massachusetts, as well as in Congress, to extend Sarbanes-Oxley-like governance requirements to the non-profit sector.

As public companies seek to comply with new governance standards prescribed by law or by self-regulatory organizations such as the NYSE or NASDAQ, executives look first to their attorneys for guidance through the maze of requirements. As in-house or outside counsel, we’ve had to update codes of conduct for employees and directors; create anonymous employee whistleblower systems; evaluate new criteria for director independence; draft new charters for board committees; and more.

These responsibilities fit squarely within the expertise of the corporate attorney whose experience makes him or her proficient in advising on matters of legal compliance.

Technical legal compliance, however, is no longer good enough. Much more is required of the modern corporation – and the lawyers who counsel them.

The corporate scandals that gave rise to Sarbanes-Oxley were not borne from failures of legal technicalities. Enron spent a great deal of time and effort structuring transactions so as to strive for technical compliance with financial reporting requirements even as those disclosures violated the spirit of the same laws. And the NYSE, whose mission includes ensuring transparency in public markets, itself violated that principle notwithstanding the fact that its conduct may have been lawful.

As in-house counsel, you do not want to have to argue that your client’s conduct was lawful. The public perception and the market reaction that results from arguable legality can be harsh. It is a position no company wants to be in.

It is tempting to try to discern a common denominator as we look back over the landscape of corporate malfeasance during the past few years. It seems to us the evidence is pretty clear that among the failings that contributed to the wrongdoing was the prevalence of tone deafness among the principal participants, including the lawyers.

Almost in unison, Congress, investors, employees and the general public asked: “Where were the lawyers?” The answer, we now know, is that they were right there. It is just that they were not listening critically nor thinking strategically in their client’s best interest.

In retrospect, if any of the gatekeepers, lawyers included, involved in the Enron scandal, the NYSE contretemps, or any of the other instances of corporate malfeasance had shown a serious willingness to “do the right thing,” the outcomes probably would have been very different.

New Realities

So what impact is there on the role of the corporate counsel as a result of Sarbanes-Oxley and the new realities of corporate governance? Using the metaphor of a job description, we think that the position needs to emphasize several key points: