Richard Moorhead, Alan Brener, Paul Gilbert, Steven Vaughan and I have written a paper in which we make a series of suggestions as to how in-house lawyers (IHLs) can work more closely with the non-executive directors (NEDs) in large business organisations. Our draft guidelines, which are drawn from a wide variety of professional and academic sources, are not directed at IHLs, but at their organisations. They seek to recognise and promote the significance of the legal function, and the infrastructure supporting the quality, leadership, and oversight of that function. We see this as vital both to ethical leadership within legal teams and healthy risk management and ethical culture within the organisation more broadly.
There is an absence of corporate governance and professional guidance on the role of IHLs and the in-house lawyer/non-executive director relationship in particular. We are seeking to address that gap. We want to get a discussion going on a set of best-practice principles which might be adopted by organisations to frame this relationship: we have kicked this off with some suggested guiding principles, which are set out in the paper. You can access the paper here: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3410929. If you cannot access via the SSRN link for any reason, let me know and I can you send you the paper.
Our hope is that organisations will engage with, and consider implementing, these framework principles, to establish a link between these two critical governance roles. We believe that in doing so, an organisation will strengthen its ethical leadership and culture, its risk management and its overall governance. To take an example, a GC and IHLs should be especially careful in all the areas covered by these guidelines during points of corporate tension (for example, due diligence exercises undertaken under severe time pressure during an acquisition, an initial public offering, capital restructuring and when handling a regulatory investigation) where errors of judgement may be more likely to be amplified.
The key points we make are:
- NEDs perform a central role in corporate governance, in providing effective challenge to executives. IHLs are central to an organisation’s ability to function effectively and within the law. The relationships between the two constituencies is sometimes not as strong as it might be. We have set out a tentative framework to enable businesses to ensure that NEDs and IHLs have a stronger understanding of each other’s roles and how they can support each other in those roles.
- Our own informal discussions with NEDs suggest they would like to understand better the role of IHLs and how they may assist in providing support and challenge. In fast-paced, commercially driven organisations, where elevated ethical pressure may be normal, there is a collective responsibility and desire to help ensure NEDs and IHLs have the knowledge, relationships and support they need to thrive.
- It is important that the leaders of an organisation foster a culture where employees do the right thing based on ethical norms, recognising ethical dilemmas when they arise and feeling able to challenge constructively. Boards can play a lead role in setting the ‘tone from the top’, supporting the development of an ethical culture in the organisation. IHLs can support them in this role.
- The guidance principles are forward-looking. Punishing ethical misconduct when it occurs is an important part of professional frameworks, but forward-looking approaches may be as or more important in helping to ensure misconduct does not occur in the first place. We think there is a need for guidance that helps organisations, boards, and IHLs support the conditions for well-run legal functions that serve the organisation professionally, appropriately balancing their obligations as partner to, and guardian of, the business. Supporting the integrity and independence of professional judgments is as vital to this as ensuring appropriate levels of commerciality.
The guidelines range from broad principles about governance and leadership, to quite specific operational suggestions.
- As an example of a broad principle, in Principle 1 we propose that the general counsel and the board should have an explicit, shared understanding of how the legal function contributes to the ethical culture of the organisation. This should include a clear statement as to the organisation’s expectation of the role and responsibilities of the general counsel as a senior executive working in partnership with the senior management of the organisation. It should also reflect the general counsel’s position as a guardian of the organisation’s legality and a key contributor to its ethical culture.
- As an example of more operational proposals, we suggest (in Principles 4 to 8) that NEDs be involved in the hiring, induction, appraisal, remuneration and any proposal to terminate the employment of, the general counsel and other senior IHLs. On this final point, one of the obstacles to a general counsel’s independence is the risk of being fired by the CEO. Thus, we propose that a decision to remove the general counsel should only be made with the active participation of the NEDs. In Principle 13, we recommend that the general counsel should attend board and executive committee meetings, so that she is appraised of major developments and decisions within the organisation.
The guidelines have been prepared with larger businesses in mind, though they may also be of broader relevance. The guidelines arose out of a discussion with the Banking Standards Board and an invited group of senior non-executive directors and GCs from the financial sector. We have now broadened the guidelines in order that they may be adopted by business organisations regardless of sector.
In all, we have proposed 29 draft guidelines, accompanied with commentary explaining why we think adoption of the principle will strengthen the ethical leadership and culture, risk management and overall governance of the organisation.
We think it important that the guidelines are useful and challenging, rather than prescriptive. We are interested in hearing whether the guidelines frame and raise the right kinds of issues experienced by NEDs and IHLs. Is anything missing? How might the guidelines be improved?
We welcome any comments on these guidelines. As I said, we think this is an important debate and we want to get it started.