There are professional and ethical obligations they must live up to as they balance managing the risk of an organization with adding value and meeting expectations of all their “masters.” But the lines should be crystal clear, according to a panel on the role of general counsel at last week’s Association of Corporate Counsel seminar: Law Department Leadership 2.0.
Knowing exactly who the client is will go a long way to avoiding issues of conflict of interest, said Spencer Enright, president and CEO of Brookfield Real Estate Services Ltd., who spoke on a panel with Deloitte LLP’s general counsel Ken Fredeen, and Alan James, a partner with Gowling Lafleur Henderson LLP.
The panel looked at various challenges general counsel may find themselves in including the expectations of non-lawyers, how lawyers add value, managing risk, and professional and ethical obligations including conflict of interest.
In terms of expectations of non-lawyers, besides maintaining regulatory compliance, monitoring for misconduct, and supervising the legal department and providing strategic value creation, the GC should “provide courage to overcome fear, panic, seller’s remorse, buyer’s remorse, and risk aversion.” It’s a tall order.
Where some question the idea of GCs being “gatekeepers” versus value creators is in how they are paid. Some wonder whether equity compensation programs are appropriate given they are considered “gatekeepers” of the organization. But the same could be said for CFOs, pointed out James.
Compensation v. reporting structureFredeen said he has more concerns about reporting structure than compensation structure. He favours in-house lawyers operating in a centralized group rather then becominge too embedded with the business units.
“I’m not in favour of a diffused model as it can lead to bad behaviour by lawyers in isolated silos,” he said, referencing situations such as Enron and General Motors, where lawyers failed to blow the whistle on what was happening.
“Nobody has an interest in allowing bad behaviour because someone will come after you to say ‘Why didn’t you do something earlier?’”
Conflict of interestTheir role as “value creators” is also subject to the Rules of Professional Conduct, which includes honesty and candour, courtesy and good faith, avoiding conflicts of interest, whistleblowing, and up-the-ladder reporting.
Conflicts of interest are likely to arise in the following situations:
• When acting for the parent and subsidiary of a company;
• Acting as lawyer and director of officers; and
• Advising the organization and individual employees or officers.
For example, a GC may find himself or herself in a conflict of interest when acting for the parent and subsidiary of a company and the company doesn’t hire separate counsel for each region, said James.
“If you’re representing a parent and a subsidiary and the company is trying to sell the subsidiary or there are bankruptcy proceedings within the parent or the subsidiary, that’s where you run into issues because the interests of the two companies are not aligned and you’re trying to act for both,” he said.
It is also common in smaller global companies not to hire in-house lawyers in every jurisdiction, which may mean one lawyer at the company’s head office is trying to act as the GC for the world.
“That’s when you can also run into conflict of interest when there is a sale or bankruptcy event and the interests are not aligned,” said James.
In that case, external counsel could be retained to represent the subsidiary and the GC would no longer act for that part of the company.
Whistleblowing — it should never get to this pointThe panel also discussed whistleblowing and how it applies to in-house lawyers. According to Ontario’s Rules of Professional Conduct, it should apply in the following situations:
• When you are a lawyer “employed or retained” by an organization;
• You “know” the organization is acting dishonestly, fraudulently, criminally, or illegally;
• Take steps to advise the person from whom the lawyer takes instructions and, if necessary, the CLO and CEO, that the conduct should be stopped;
• If necessary, advise the next highest persons or groups, including ultimately the board of directors, that the conduct should be stopped;
• And if the conduct does not stop, withdraw from acting in the matter, which, based on the commentary, would be resigning.
Ideally, Fredeen said, situations should never get to the whistleblowing stage.
“You need to nip it in the bud,” he said. “You need to be really engaged with the business and diffusing it before it gets to the whistleblower stage. It’s about being visible — we are there to provide the moral, ethical code.”
Where lawyers are new to an organization that has not previously had an in-house counsel role, Fredeen said, it is critical to “get in and make friends” with senior people.
“If you don’t have the GC title, no one pays attention to you — you need to have that title. All you can do is find allies and show the value you bring. Find out where the naysayers are. Some organizations may think it’s about being paid more money but not necessarily,” he said.
James said that whenever a lawyer suspects an organization is operating fraudulently, he or she needs to take it up to the board of directors.
“If it doesn’t stop, you have to resign,” he said. “It means you have to quit your jobs.”