Corporate Chronicles

Episode 2 of a 13-part weekly series on good governance and ethical conduct.

In this series I will be examining general issues of corporate governance and reputational risk. If any readers have specific business integrity and governance topics they’d like me to explore, please message me here on LinkedIn or email me.

The Role of the General Counsel & Directors' Duties: Conform or Resign.?

Whether or not the General Counsel (GC) is a director, there are deep similarities with the fiduciary responsibility for good governance for which all senior officers, executives and directors are accountable and responsible.

Poor governance has been instrumental in the following catastrophic failures.

Wirecard: Management Misconduct. Inadequate Board Oversight. Once hailed as a fintech success, it collapsed in 2020 due to massive financial fraud concealed by deep flaws in its governance practices. Senior executives, including the CEO, were implicated and it was revealed the board failed to adequately oversee and scrutinise its operations and financial reporting.?

Satyam: Ethical Failures. Oversight Lapses. A beacon in India's IT sector till its downfall in 2009. The Chairman confessed to fabricating financial records showing a corporate culture of deceit, a breakdown in ethical leadership and a failure of board and audit scrutiny and oversight.

Theranos: Deception. Fear. Secrecy. Once a celebrated name in health technology, it collapsed when its blood-testing technology was exposed as a sham. The CEO falsely represented the technology's capabilities. The board, lacking medical expertise, failed to scrutinise company claims, and there was a culture of secrecy and fear, stifling those who wished to speak the truth.

Carillion: Mismanagement. ?Once a major UK construction and services company, it collapsed in 2018 due to key governance failures involving financial mismanagement. It continued to pay high executive salaries and dividends despite declining financial health and the board and auditors did not challenge the management and business model or scrutinise financial practices.?

Volkswagen: Ethical Breakdown. In 2015, 'Dieselgate' arose when software was installed in diesel vehicles to cheat on emissions tests. A culture of unethical practices was revealed, including the decision to deceive regulators and customers. It highlighted the complicity of senior management, serious lapses in internal controls and inadequate board oversight.?

Common themes?

In all instances, directors, senior executives, officers, auditors and lawyers failed to deliver on their fiduciary responsibilities, thereby leading to glaring gaps in governance, liability and loss of shareholder confidence. Issues ranged from ethical conduct, compliance with laws and regulations, and neglect of shareholders and stakeholders interests..

Whose job is it?

Important questions arising in the case of Enron: Were in-house or external counsel called to assist managers to conceal actual financial performance from owners and shareholders? Whom were lawyers representing?? Did the lawyers represent Enron, the company itself, or were they in practice, acting for individual executives and not as required, acting for the shareholders?

Boards then face an obvious dilemma – especially if the Boards are from publicly listed entities. When organisations hire lawyers, Boards should be aware of the inherent conflict for lawyers (in-house or external), who are employed by the very organisation or people, they are being asked to police.

But is it the job of lawyers to police? That may suggest to some that lawyers consider themselves the arbiter of good corporate conduct. Rather, I think the challenge lies in organisational ability to enable and empower the GC, like other executives with fiduciary responsibilities, to effectively identify and address governance matters and manage legal risk, by ensuring that there is contractual clarity in the GC’s role and accountabilities.

Where were the lawyers in the UK Post Office Horizon scandal as Richard Moorhead asks.

One rotten soursop spoils the tree?

Amidst recurring claims of the “one bad apple” or more colloquially, one bad soursop spoils the tree, organisations have traditionally pointed to a single rogue employee or communicated breaches as anomalies. However, if we scrutinise the myriad corporate collapses, there is a theme which contradicts the random theory.

This is not one rogue actor's doing

The eventual failure (when it finally comes to light) is rarely an isolated incident by solitary bad actors. More often than not, the failures represent a progressive breakdown in ethical oversight. They conveniently overlook the shared culpability of the board and senior executives, and obscure the fact that these failures stem from an organisational culture shaped and marked by a leadership void and a blatant disregard for shareholders and stakeholders alike.

This collective dereliction at the executive management and board levels constitutes a profound abdication of fiduciary responsibility by those entrusted with the highest duty of care. Heroes in the UK Post Office scandal, like Alan Bates, the subpostmasters themselves and supporting cast, James Arbuthnot, Nick Wallis, Richard Moorhead, have, with dogged determination in the face of serious obstacles, threats and loss of everything that matters, demonstrated the collective lack of accountability.

Roles. Responsibilities. Reporting Lines.

Governance, operational and compliance failures can often be traced to a lack of ethical stewardship, a lack of independence of the GC, weak governance protocols, and lip-service values.? So what then is the role of the GC and what are the duties of directors in this mix? And how can an organisation ensure that its appointed officers have the necessary independence to protect reputation and preserve trust? How can the GC be allowed the ability to speak up and challenge questionable conduct to uphold standards and codes of ethics in order to protect and mitigate brand and reputation? The UK Post Office Horizon Scandal is now an iconic example of how easily trust and brand can be eroded.

Just follow orders and don't ask questions

In my 30+ year career as a lawyer, I have been told on many occasions that the role of an in-house lawyer is to get the business done – i.e. the way the business wants it done. In other words, just simply follow their instructions and don’t ask questions. However, with the steady introduction of new regulations and Acts, the role has evolved significantly since I graduated from the University of the West Indies and the Hugh Wooding Law School. Today’s in-house lawyers have had to pivot from “dotting the i’s and crossing the t’s” to examine and interpret the spirit and letter of the law – and to ensure compliance with regulatory requirements. As the UK Post Office scandal should teach all GCs and in-house counsel, don't be like Susan!

In this context, and in order to address the significant number of corporate collapses we have seen over the years, the the GC's role in corporate governance has commensurately evolved. Like the Board, bound by the rules regarding directors' duties, the GC has fiduciary responsibilities, akin to the Board and senior executives. Yet, the GCs role is at times fraught with obstacles – from structural muzzling to restricted access to inherent conflicts between the profit motive and independence.

Remedies and Recommendations

To remedy these obstacles, the reporting lines are critical to ensure that the GC can deliver on expectations. In an ideal situation, the GC should report to the CEO/GM and have access to the Board. If there is no access to the Board or Chair of a Governance Committee, then ultimate control lies with the CEO/GM.

An inherent conflict for the GC or persons holding accountability for ethical compliance and oversight, could be pay structures that incorporate performance bonuses tied to business objectives. This could result in a lack of will or independence for in-house lawyers to advise against certain actions that could cost them a bonus or pay rise, or which could penalise them for giving advice, in the best interest of the client, or against a particular course of action.

The recommendation for preserving the independence of the GC and her/his ability to operate without fear or favour, is that the appointment and removal ("the hiring and firing") of the GC should be by a formal decision of the full board and not by the CEO/GM. In the instance therefore, where a GM/CEO finds themselves in a position of potential conflict, where the means of delivering on a business objective is linked to regulatory, legal or ethical breaches, the decision should only be made with the active participation of all the non executive directors.

Cause and Effect

All the cases above involve a variety of industries, circumstances and laws, and there is a striking similarity to the level of individuals involved. All the organisations mentioned had reputable boards, high flying and highly paid executives, CFOs and GCs, highly paid consultants and advisers — both inside and out and yet - they failed. Shareholders and stakeholders alike, suffered.

These collapses, failures, catastrophes, don't happen overnight, they are a result of a pattern of behaviour where those with fiduciary responsibility either did not exercise their right to ask questions and failed to fulfil their responsibility to ask questions or they tried to speak up, to speak truth to power and were silenced or removed.

Conform or Resign

It is a quandary GCs may face at least once in their career. Conforming at first instance could mean staying on to work within the organisation to rectify issues and align the company’s practices with legal and ethical standards. It might involve advocating for change, trying to influence the corporate culture, and ensuring compliance. However, sometimes it could mean abandoning ethical standards and, at that point, the General Counsel faces a profound dilemma. This situation could arise when the GC is pressured to overlook or endorse unethical or illegal practices within the organisation. Some potential scenarios:

• Pressure to overlook questionable or unethical actions
• Complicity by participating in or facilitating legally/ethically wrong decisions
• Sacrificing integrity and justifying actions that contradict professional ethics

This type of conformity often leads to a conflict between personal values and professional duties, potentially resulting in legal issues, reputational damage, and personal moral conflict. In such situations, the GC has to make a critical decision to stay and compromise, or leave and maintain their professional and personal integrity.

In their fiduciary responsibility to shareholders, the Directors play a pivotal role in shaping corporate culture and ensuring compliance and robust governance structures and processes. They must create an environment where ethical conduct is valued as much as financial success, where the voice of the General Counsel is not just heard but heeded.

General Counsels and Directors, your decisions echo beyond boardrooms. Every decision has to be weighed against safeguarding integrity vs succumbing to compromise. The mantle of true leadership, unlike the invisible clothes of the Emperor, is heavy, but real.

In the next post I will explore Cons, Conflicts & Cronies.

References and additional reading

1. Episode 1: Boardroom Echoes & Egos: The dangers of groupthink
2. Rachael Johnson: The general counsel's role in corporate governance
3. Nick Gould: Submission to the post office enquiry
4. Richard Moorhead, Paul Gilbert and others: In-house counsel and NEDs
5. Jenifer Swallow and Ciarán Fenton: Independence amendment letter
6. Neil Rose: Were lawyers complicit in PO's corporate governance failures
7. The UK has an accountability problem - just look at the Post Office