Corporate governance and the in-house lawyer

Since then a series of regulatory codes and legislative provisions, often in response to further corporate failings, have sought to promote high standards of conduct and provide greater transparency and protections in order to minimise the scope for future misconduct and mismanagement. 

While the Board has the ultimate responsibility for directing and controlling the organisation, much of the practical work around Corporate Governance is carried out by management on the basis that the Board will set the policy; management will implement it; it will be monitored by control functions (such as internal audit); and the entire organisation will be responsible for adhering to it.

This increased emphasis on Corporate Governance has resulted in an enhanced role for in-house lawyers and General Counsel (GCs) who have taken on a wider brief in advising on the relevant legal (including regulatory) requirements and also helping to identify and manage legal risks relevant to the organisation’s business.

This work is important, not least as the consequences of poor governance can have disastrous consequences for the organisation and, potentially, individual directors resulting from regulatory sanction, damage to reputation and financial loss.

In this article we consider some of the ways in which in-house lawyers work to support good Corporate Governance in their organisations.

What is Corporate Governance?

Corporate Governance is concerned with the systems by which organisations are directed and controlled. Its scope is wide. According to the G20/OECD Principles of Corporate Governance 2015, Corporate Governance involves a set of relationships between a company’s management, its board, its shareholders and other stakeholders. It also provides the structure through which the objectives of the company are set and the means of attaining those objectives and monitoring performance are determined. The OECD was promoting good corporate governance as a way of building trust in business and preventing corporate wrongdoing. The Institute of Chartered Accountants in England and Wales says that ‘The purpose of corporate governance is to facilitate effective, entrepreneurial and prudent management that can deliver the long term success of the company.’

In the UK this has resulted in a string of regulatory provisions since the Cadbury Report in 1992, primarily concerned with putting in place changes in corporate practice and conduct following high profile examples of misconduct and mismanagement in listed companies. The focus of these changes has been the role of the Board and Board committees (such as in relation to audit and remuneration), and the roles of the Chair and CEO and (in listed companies) the Company Secretary.

Corporate Governance has evolved in the face of a number of high profile corporate failures to cover a broad range of areas – for example:-

• The rights and equitable treatment of shareholders.
• The interests of wider stakeholders of the organisation.
• The role, responsibilities and processes of the Board, its directors and committees.
• Standards of integrity and ethical behaviour.
• Managing conflicts of interest.
• Avoiding abuses of corporate power.
• Legal compliance and risk management.
• Limiting executive remuneration.
• Financial controls, disclosure and transparency of financial and other matters.
• Diversity and equality within the organisation.

The role of the in-house lawyer

There are a number of ways in which the GC and in-house lawyers contribute to good governance within their organisations. Here we consider two in particular – legal advice on Corporate Governance and the management of legal risk.

1. Legal advice on governance issues

In many organisations, the Company Secretary is the Board’s main advisor on Corporate Governance matters. Sometimes the role of Company Secretary and GC are combined, or the Company Secretary may report into the GC. Whichever the model, the Board, Board Committees and the Chair and directors require advice on Board procedures, their powers, responsibilities and obligations as well as in relation to Corporate Governance matters arising across the organisation. Best practice will require a robust selection process and induction programme for new directors and regular individual and Board development and assessment procedures, for example.

While a Company Secretary does not need to be a lawyer, a lawyer can bring certain qualities to the role, including their legal knowledge across the company’s business, their high professional and ethical responsibilities and the fact that their legal advice will usually be privileged.

2. Board Access

If the GC is also the Company Secretary, they will have access to the Board and Board committees and have the opportunity to develop a relationship with the Chair and directors. Sometimes the GC will be a member of the Board (although some feel that this compromises their independence). Nevertheless, it is important that the GC is satisfied as to these matters (at least) in carrying out their role:-

• Ensuring that they have the necessary authority, time, resources and independence to discharge their responsibilities;
• Equipping themselves with the relevant skills, training and expertise;
• Agreeing a mechanism for raising concerns with the (independent) Chair or non-executive directors if issues can’t be resolved through normal reporting lines;
• Making sure that their legal advice is clear and recorded to avoid misunderstandings;
• That they are able to meet their professional obligations and making clear where those obligations may be undermined or compromised.

3. Managing Risks

The Board is responsible for identifying and managing material risks, whatever their nature. Most organisations will have sophisticated risk management processes and will ensure that risks are regularly assessed and reviewed.

The International Bar Association defines legal risk as:

‘The risk of loss to an institution which is primarily caused by (a) a defective transaction, (b) a claim (including a defence to a claim or a counterclaim) being made or some other event occurring which results in a liability for the organisation or other loss (for example, as a result of the termination of the contract), (c) failing to take appropriate measures to protect assets (for example, intellectual property) owned by the institution, or (d) change in law.’

While legal risk may or may not be a separate category of organisational risk, it will permeate many areas of the organisation’s activities and the in-house lawyers will be expected to play a key role in identifying and managing legal risk.

This is an area where in-house counsel can really add value as Boards and senior managers are often not lawyers (the GC apart) and so rely heavily on in-house counsel in this area. And even where the legal risks are commonly understood and recorded, the lawyer plays an important role in calibrating legal risks so that they can be appropriately managed. This is not just relevant to risk management processes but is also important when the Board and management are setting its strategy and needs to understand the scope, likelihood and impact of a material legal risk.

Legal risk can be further sub-divided into enforceability risk and regulatory risk.

Enforceability risk – this relates to the validity and enforceability of the organisation’s contracts and property rights, including intellectual property. Risks may arise through legal uncertainty or change, the incapacity of a counterparty or ambiguity in contractual terms. Drafting, reviewing and enforcing contract terms is a staple of the in-house lawyer’s role and, in contributing to Corporate Governance, lawyers will identify areas of particular risk and uncertainty arising.

Enforceability risk may be managed in a number of ways. For example:

• Limiting the individuals who can commit the organisation financially and legally;
• Consulting the Legal team in defined circumstances;
• Following defined processes and using standardised documents before making any binding commitment on the organisation’s behalf;
• Maintaining a panel of approved external law firms;
• Capping and controlling contractual liabilities with particular regard to the organisation's insurance arrangements; and
• Limiting the governing law of contracts to English law or, if advantageous and if with suitable advice, that of another jurisdiction.

The lawyers can also play an important role in training and education of staff, including on managing relationships with third parties, negotiation and keeping contracts up to date.

Regulatory risk – this refers to the risk of sanctions, financial loss or reputational damage as a result of non-compliance. Many organisations in highly regulated environments appoint a specialist head of compliance to identify and manage regulatory risks or pass the duty to the Company Secretary or to the General Counsel. Whoever, the need is to identify the risks and design and implement procedures to ensure compliance and manage the consequences of non-compliance.

Depending on the structure of the organisation and the regulatory environment, it may be helpful to manage these risks along departmental lines, with a single person having oversight over the risks in their area.

Identifying regulatory risks across multiple jurisdictions is a major task, so help may be needed from external counsel. Working closely with manager colleagues is also important as they may be aware of conflicts of interest that the lawyers are not privy to.

4. New responsibilities for in-house lawyers?

The UK’s principles based model of Corporate Governance based on underpinning confidence in companies and business generally has developed into one where shareholder value has been seen as key. Experts in the field have suggested that there will be increasing emphasis on organisations adopting, measuring and reporting on how they adhere to an increasing range of ethical standards in carrying out their business. This involves the embedding of an ethical culture with the Board leading by example to ensure that good standards of behaviour permeate through all levels of the organisation and, in particular, by connecting purpose and strategy to culture; aligning values and incentives; and assessing and measuring corporate culture.

It seems unlikely that the GC and in-house lawyers will not be expected to play a key role in helping their organisations develop effective systems that support compliant and ethical decision-making, performance and outcomes. 

Reference Material

A Fine Line – C&I Group 2006 

Reconciling the Irreconcilable – C&I Group 2005 

History of the UK Corporate Governance Code – FRC website 

Ethical Business Practice and Regulation – Christopher Hodges and Ruth Steinholtz 2017