In the wake of the corporate scandals in the late 1990s and early 2000s involving misappropriation of resources, bribery, fraud, breach of fiduciary duties, and other such shenanigans, there was a large public outcry on the part of shareholders, the media, the regulators, the government, and other community stakeholders asking “where were in-house counsel, were they asleep at the wheel?”
A wave of reforms followed, including The Sarbanes-Oxley Act of 2002, stock exchange regulations, and corporate laws on fraud and other corporate malfeasance. Once fiercely and relentlessly attacked these reforms seem now to be regarded with a mixture of mild disdain, fatigued acquiescence, and occasional mild praise.
Against this backdrop it is more important than ever that in-house counsel be aware of and properly manage actual and potential conflicts of interest.
Below are some examples of the sort of conflicts that regularly confront in-house counsel.
Conflicting interests among the executive management team
In-house counsel are often asked to advise senior executives regarding matters in which his or her personal interests conflict directly with the interests of the corporation. It is important to be mindful that in-house counsel has but one client: the corporation, and not any of its constituents such as the individual directors, officers, or employees, including the executives.
Observing that principle on a consistent basis can however be excruciating. A common example is being asked to answer a legal inquiry regarding the executive’s employment relationship with the corporation, i.e. his or her employment agreement, stock options, severance package, and retirement, health and other benefits. In-house counsel often feels pressure to satisfy the desires and protect the interests of the executive.
One might rationalize, conveniently, that the conflict is relatively nominal, the potential for actual conflict is somewhat remote and the interests of the corporation and the executive are more or less aligned so no harm will come from providing the advice, and in any event no one will be any wiser. And who after all wants to be a stick in the mud, and have to declare a conflict of interest and explain to a senior executive that he or she will have to hire his or her own counsel?
Conflicts that appear to be small can, however, lead to larger ones. Remote possibilities have a funny way of coming to fruition. Of course it is unethical and simply bad practice to assume that advice can be given where there is an apparent or actual conflict based on the notion that no one will know or be hurt.
Counsel should always analyze issues from the corporation’s perspective. In-house counsel should make it a habit to phrase advice in terms of the company’s interests and, when necessary, politely remind senior executives they are not permitted under applicable ethics rules to give legal advice that might be construed as inconsistent with the company’s interests.
The first step in doing so is identification, i.e. asking what is the company’s interest in a particular matter, and the second is how is it best served?
Another almost daily challenge is to protect the company in the face of internal vested interests. Sales folks working on commission usually prefer to make do with a minimum of contracts, are keen on seeing products hit volume production, and are focused on having as few obstacles to doing business with customers as possible. While those in the quality assurance and operations area are tasked with ensuring products are carefully tested, not released until they are fully debugged, and they have formal sign off from the marketing department as well.
Each “stakeholder” may approach the legal department with their own narrow sets of concerns and issues. It is the role of in-house counsel to be aware of these often competing interests and not be manipulated or shoe-horned into providing advice which caters to a particular vested interest, while disregarding the others.
Being able to act unbiased in the company’s best interests not only requires an awareness of all competing stakeholders, but also a thorough understanding of the true facts, which may in some cases require an in-depth investigation followed by a careful analysis of what is best for the corporation, and not any of its individual constituents.
Non-conflicting personal interests among employees
Another common occurrence is the request by employees for free legal advice regarding strictly personal matters that are wholly unrelated to the company. It should be remembered that work performed by in-house counsel is a corporate asset, paid for out of corporate funds. Even if there is no perceived or actual conflict of interest between the employee and the company, in-house counsel should not be misappropriated for personal use.
Identifying the problem and the governing principle is only the first step. The more important issue is how to respond, for example, to a CFO who is asking for personal legal advice.
In some cases, it may be black and white: the advice requested is outside the ambit of counsel’s skill and experience. The more difficult scenario however is one where the CFO has a question regarding, for example, his spouse’s employment severance, or a real estate matter. It may be difficult to dodge the question if employment law and real estate are part of your general competence.
In-house counsel has a duty to inform the executive that he or she has no professional liability insurance covering personal representations. Better yet, it would be prudent to have a company policy on legal representation to point to before the fact, including a stipulation that in-house counsel is not authorized and should not be asked to provide legal advice on strictly personal matters since legal services are a corporate asset.
Lawyers acting in business roles
In the aftermath of the Enron and WorldCom scandals it became clear that rather than act as gatekeepers, in-house counsel used their expertise to aid and abet unprecedented levels of corporate fraud. This was accentuated by the fact that the role of in-house counsel had evolved from a traditional nuts-and-bolts lawyer to being a trusted member of the senior executive team.
Nowadays many in-house counsel manage transactions or disputes on a routine basis, making business judgments on behalf of the corporation. The issue here is who, if anyone, will provide legal advice about the business decisions made by the lawyers.
One choice is an in-house lawyer who either reports to the decision-maker or works in the same department. The capability to review such business decisions may however be limited by the legal department’s resources. Furthermore, other in-house counsel may lack the depth of expertise in the subject matter of the decision. In addition, a subordinate attorney may be naturally reluctant to criticize a more senior lawyer’s judgment.
The other option is to turn to outside counsel. Although this means additional expense, it may well be worth it. But the potential for conflict of interest still lingers because a law firm hired by counsel might be reluctant to criticize his or her judgment for fear of losing additional business.
Each of these measures is not foolproof, so it is important to appreciate its shortcomings, and address each situation on a case-by-case basis with the optimum course of action.
These potential difficulties do not mean that in-house lawyers should refrain from making business decisions. They mean that when in-house lawyers are acting in a business capacity, they should be aware of that role and be prepared to have their decisions scrutinized by other counsel.
The identification and management of conflicts of interest is vitally important as the business world becomes increasingly complex. Conflicts may be such that in-house counsel may be required to “report the conflict up,” withdraw from the matter, request that the matter be reviewed or handled by other lawyers in the department or by external counsel, and in some egregious cases, resign his or her position.
Navigating through those conflicts is often perplexing, however the basic principles at the departure are simple, one must remember that there is only one client, the corporation, and that counsel must always act in the company’s best interests.