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The Role of the General Counsel with the Board of Directors

Jörg Thierfelder of Egon Zehnder explores the evolution and impact of a role that has never been more challenging on the different corporate levels than it is today

  • July 2011

Over the past decade, a variety of forces and events has made the role of the General Counsel (GC) more prominent than ever. The market turmoil following the bursting of the internet bubble in early 2000, the ensuing corporate scandals, ever-growing litigiousness and, most recently, the issues of risk and liability raised by a worldwide economic crisis unparalleled for generations, together with the ongoing vulnerability of private and public finances have all contributed to a renewed focus on the chief steward of the legal and ethical behavior of a company. At the same time, globalization has compelled GCs to master difficult and complex matters of ever more stringent regulatory regimes and enforcement practices, local jurisdiction and political impact, taxes, capital markets, and many others, including the challenges of more diverse and unpredictable business situations and industry trends.

Therefore, it is no surprise that their expertise is required more extensively and at an earlier stage for critical management decisions. That is why in many companies there is a strong argument for integrating the role much more closely with the business to the point that this expertise extends far beyond functional issues to distinct matters of strategy. Instead of simply and often somewhat reactively analyzing an issue from a legal perspective, GCs help remove obstacles and foster business objectives in a proactive manner. Meanwhile, they are expected to ensure that the company maintains the highest standards of legal and ethical behavior, adroitly balancing the dual imperatives of company performance and corporate integrity. Against this background GCs make use of their deep knowledge of the company, their insight, and broad experience to engage actively with all parts of the business.

However, while the GC increasingly and visibly acts as a close and trusted advisor to the CEO new developments and demands call for an extended role for the GC in corporate governance as well. In this context, the cooperation and influence of the General Counsel vis-à-vis the Board of Directors often gets less attention than it should. But this relationship is more relevant than ever due to growing requirements in surveillance and guidance of core business activities and strategic direction, as well as deeper involvement in key topics like audit and compliance, nomination and remuneration of executive management, and social responsibility. GCs today work much more closely with their Boards of Directors and board committees. Hence, it is interesting to take a look at the functional relationship of the GC with the board in more detail, assess the impact of specific governance aspects on the GC role, and draw some conclusions about the implications of these issues for the careers of senior lawyers.

Functional relationship of the GC with the board

The degree of involvement of the GC in meetings of the board and its committees has risen continually in recent years. This trend is now stronger also in Europe, where GCs have significantly more often become members of the executive management team, thereby interacting regularly and closely with the board. Besides offering legal expertise and advising on risk exposure, liability, compliance, and governance, these GCs take a broader view that encompasses the company’s reputation and integrity. As Ben Heineman, former General Counsel of GE and currently distinguished senior fellow at Harvard Law School’s Program on the Legal Profession, says, “The General Counsel should ask not just whether something is legal, but whether it is right.” The GC should therefore stimulate and assist the board in leveraging its authority to set the tone for the legal and compliance culture of the whole company. At the same time, it is the GC’s duty to take an active role in counseling the board on how legal and regulatory environments can be used to a company’s strategic advantage. This constructive engagement today is fundamentally influencing the role of the GC with the board – a factor that boards, in many instances, may not even be aware of yet. Further, while board members have become much more sensitive about the company’s exposure to liability they are also more concerned about their personal exposure, especially given the likelihood today that at some point in their tenure they will be included in a lawsuit. As a result, besides seeking the GC’s advice about general company matters, board members consult more frequently and in more detail about those issues that are of a clear-cut supervisory or even personal nature. However, in this context the GC should always realize and clearly signal to the other stakeholders that he ultimately serves the company as a whole and must not represent individual interests of board members or other particular stakeholders. Finally, today’s GC also makes significant contributions in a broad range of other board matters and activities, including board composition and competencies, the selection of external advisors, compensation, crisis management, and communications. As the gatekeeper of the company’s most important information, the GC is best positioned to ensure that the board acts across all of these and its many other activities to create and maintain a consistent and impeccable corporate identity.

Impact of specific governance models

With the more intense focus on corporate governance around the globe, the changes in the role should also be viewed in light of the different governance models applicable to large and mostly listed corporations. In one-tier governance systems (like those prevailing in Anglo-Saxon jurisdictions) the GC by nature has closer links to the board, especially when functioning as a member of the management team. By contrast, the strict differentiation between non-executive boards and executive boards in two-tier governance systems (as, for example, in Germany) traditionally leads to a stricter separation of the GC from the board. However, these differences appear to be decreasing. In two-tier governance systems, GCs have clearly become more directly involved in management decisions, even having become more than before members of the Executive Board (first tier). And, as described above, they are and should be regularly consulted for Supervisory Board matters (second tier). At the same time, in one-tier systems, like that of the U.S., companies are increasingly separating the roles of Chairman and CEO, thus emphasizing the difference between day-to-day management responsibilities and the oversight function of the board, and creating a routine culture of checks and balances. In this latter development the role of the GC with the board gains in importance as it requires distinct relationships with the CEOand the Chairman. In both systems, the GC works more closely with non-executive directors, who are under pressure to provide more transparency and independence in their roles – requirements that the GC is uniquely suited to address.

Importance of direct board access

This situation obviously has an impact on the relationship of the GC with the CEO, especially in the event of conflict. While it seems best practice today that the GC has a direct reporting line to the CEO he must have the right to bring controversial issues to the Chairman or individual board members without the prior consent of the CEO. This is comparable to the dotted line to the Audit/Compliance Committee that the Chief Compliance Officer typically is entitled to. This privilege should be made clear upon appointment of the GC or even included in the company’s statutes. Even if the GC is a member of the executive management team, good governance today requires the right of the GC to interact directly and periodically with the board, particularly if he feels a need to do so in the company’s best interests. It is a good idea to establish meetings of the GC with the board and its audit or other relevant committees on a regular basis, including time during which the CEO is not present. The GC’s ultimate client is the company, and its interests must be his guide. This also means that in extreme cases a strong and autonomous GC should have the courage to resign when he feels that the key interests of the company are not properly being served.

Formalizing the GC’s role and access to the board is one thing. However, in the end, it is ideally the GC who has to attain a level of trust with board members such that they will turn to him no matter what the governance structure of the company might be. As Beat Hess, former Legal Director of Shell and active member of several boards, says: “Ultimately, if you have credibility with the board and with the Executive Committee, you will be consulted whether you are a member or not.”

Ensuring good governance at all levels

The GC also has another relevant relation with the board around corporate governance at the subsidiary level. Many executives are appointed to boards of subsidiaries, joint venture companies, or other affiliates of a group without ultimately realizing related legal consequences. The interests of a subsidiary or affiliated company may conflict with the interests of the parent company or other entities of the group. Examples of crucial and legally dangerous situations might be under-capitalization or even insolvency, inter-company loans, guarantees, or transfer pricing. In this context, the board members of these companies can come under severe scrutiny of regulators and attack from minority shareholders, employees, unions, media, and other stakeholders. Board membership at the subsidiary level should therefore not be taken lightly. GCs play an important role in educating executives about the importance of these mandates and how to deal with them. It is part of the GC’s responsibility to ensure that good governance is respected not only on the holding company level but at all levels of the group. In fact, as often happens in various situations, there may be good reasons to appoint GCs to subsidiary boards, a practice which, while not infrequent, must be carefully balanced against the GC’s other priorities and overall workload.

GC and Company Secretary

Another important governance issue lies in the distinct relation of the GC with the Company Secretary vis-à-vis the board. While in the U.S. the functions of General Counsel and Company Secretary, there named Corporate Secretary, are often combined in the GC role, there is a trend in the UK to split the roles as described in the following article by Ian Maurice, Egon Zehnder London. The rationale for this split is not so much that the GC should not be the mere minutes-taker of the board, but that he must concentrate on the breadth of tasks in relation to functional and business expertise as well as managerial skills. In fact, this argumentation broadly applies because the role of Company Secretary has also gained in scope with expanded responsibility for regulatory and compliance matters, risk, and audit, besides including the central role in governance and administration of the company. Therefore, the long list of duties and related complexity of these issues, particularly in bigger international companies, speaks against combining the two roles in one person. And whereas the Company Secretary due to common practice or as required by law in relevant jurisdictions often has the reporting line to the Chairman of the Board, the GC is installed in the CEO’s chain of command. This may be another strong argument for the GC having the right in delicate situations to approach the Chairman directly to bring matters to his attention at the same level as the Company Secretary does, thereby underlining the independent and crucial role of the GC. In any case, the two roles require effective combination in one person or seamless collaboration between two to fulfill all the relevant tasks.

Implications for the careers of senior lawyers

As our experience working with boards and GCs confirms, the role will only grow weightier and more challenging as the supervisory and advisory functions of the board grow in complexity and rigor. Given the worldwide drive for intensified transparency and accountability in corporate governance, coupled with rising regulation and public scrutiny, boards will more and more find legal, reputational, and operational risk at the forefront of their deliberations and they will need the assistance of GCs with broad experience and exceptional skills.

Although GCs generally do not or, depending on the governance system, must not serve as formal members of the boards of their companies, their experience and skills make them excellent candidates for non-executive board membership in other companies. In an increasingly legalistic business environment, GCs as non-executive directors can bring highly specific expertise, as well as a broad perspective on governance, strategy, and risk. They are accustomed to analyzing problems, offering reasoned recommendations, handling confidentiality and, when necessary, disagreeing about an issue or course of action while remaining collegial and possibly even being able to mediate a conflict. In addition, GCs often have deep institutional knowledge of the company and the industry in which they serve. Bringing those skills to outside boards represents a further evolution of a role that is being reshaped by companies around the world and, in turn, is reshaping the way those companies approach major issues.

However, those GCs on other companies’ boards should explicitly step out of their legal mindset and assume responsibility in the broad sense in the role of member of the board. The value of a GC on a board is not primarily legal skills, but a comprehensive business perspective and wisdom. It is the role of the relevant company’s own GC or mandated external counsel to advise on individual legal matters. They are not only best qualified to do so, but also the board does not then have to appoint members for special tasks instead of for covering the bigger picture. This generally does not exclude senior attorneys of law firms as valid board candidates who, if they fit in terms of personality and wide experience, can contribute valuable outside views and know-how.

Involving the board in GC recruitment

Finally, when it comes to selecting and hiring a GC the question arises as to whether the board should be involved in the process. The assumption is that this occurs in far too few cases and often not at all. However, the elevation of the role of the GC, as well as the required upgrade in competencies of the individuals who fill that role, calls for the Chairman and the Nominating Committee of the board to have their say in it. The GC’s recruitment is a shared responsibility of the CEO and the board.

Through all of these dimensions of the relationship of the GC with the Board of Directors, today the GC has the opportunity to build strong personal relationships with its non-executive as well as executive members and become himself a member of the team of key decision-makers in the company. Of course, the extent of the role and the influence of a particular GC will depend not only on the individual’s functional expertise, business acumen, and leadership skills, but also to a substantial degree on character – the indisputable level of integrity, trustworthiness, and values that makes the GC someone board members and top leaders alike naturally turn to for wise counsel.

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