Input to the IBA on the GC’s role in corp governance

The International Bar Association is looking into the role of General Counsel in corporate governance. Rachael Johnson asked me for my perspective for her piece which you can read in full here. Extract below.

The UK’s Financial Reporting Council has proposed revisions to the UK Corporate Governance Code in the wake of high-profile corporate collapses. One response to the Council’s consultation calls for the role of general counsel to be referenced in the updated Code. The themes highlighted in this consultation response reflect a wider debate about the remit of general counsel and how the role should interact with other senior positions, as In-House Perspective reports.

The UK corporate governance regime is being reviewed as the country’s government responds to recent high-profile corporate collapses such as those at Carillion and BHS. As part of the review the UK regulator, the Financial Reporting Council (FRC), has proposed revisions to the UK Corporate Governance Code (‘the Code’). A consultation on the proposals closed on 13 September 2023 and the FRC intends the revised Code to apply to accounting years commencing on or after 1 January 2025. One response to the consultation calls for the role of general counsel to be referenced in the updated Code...

Dr Roger Barker, Director of Policy and Corporate Governance at the UK Institute of Directors, believes these updates were needed to learn lessons from recent corporate failures and to ‘reflect the rapid pace of changing expectations […] about what companies are for and their role in society’.

The FRC argues that reporting on how risk management and internal control systems have performed throughout the year ‘reinforces directors’ accountability for these systems’ and gives shareholders and other investors a clearer picture of a company’s ability to manage risk…

During the consultation period, a group of ‘corporate General Counsel and interested parties’ submitted a response. In it the group states, ‘we find it extraordinary for there to be no specific reference within the Code or its supporting Guidance to the role of the General Counsel’.

The group members describe themselves as ‘in-house lawyers with significant corporate governance experience and responsibilities within our respective organisations or an interest in the same’. In its response the group argues that the professional duties of general counsel are aligned with the goals of the FRC and the Code. It also cites academic research, which it argues demonstrates how in-house lawyers contribute to successful risk management. The group highlights the influence the position of group general counsel can have in UK-based multinationals through its involvement in areas such as governance, ethics and culture, and enterprise risk management. The group argues that corporate governance is weakened when general counsel report to individuals who are not board members.

The response highlights key areas of the FRC’s consultation that the group believes general counsel positively contribute to – for example, culture, audit and financial reporting, and risk management – and where it thinks that contribution should be referenced in the Code. In terms of risk management, the group argues general counsel are uniquely placed to assist because they have visibility across the whole organisation and can intervene ‘on risk issues without the hindrance of internal business conflicts that other executives may suffer’. As general counsel, the group members argue, their professional duties as an authorised person require and enable them to ‘hold the business accountable to its responsibilities, while maintaining professional independence from the organisation as its legal advisor’. Here the group members say their primary duty is to protect the rule of law in the public interest.   

The consultation response compares the status of general counsel in the UK with the legislative status of such professionals as corporate gatekeepers in the US in the Sarbanes–Oxley Act 2002 and the Dodd–Frank Wall Street Reform and Consumer Protection Act 2010. It argues this provides further motivation for codifying the general counsel role in the UK…

The themes highlighted in this consultation response reflect a wider debate about the remit of general counsel and how the role should interact with other senior positions. This plays out against the broader backdrop of society’s revaluation of corporate purpose, the growing influence of ESG issues and greater scrutiny over what it means to do the right thing.

The general counsel role is relatively new and has evolved into a more senior and influential position over time. Its scope and reporting lines are often defined by each organisation and the individual holding the post. As such, there’s a lack of clarity about the expectations of the role and the part it could or should play in preventing corporate failure, the driving force behind the FRC’s proposed revisions to the Code.

Jenifer Swallow, a lawyer and business adviser who led the consultation response, believes ‘lawyers in organisations make a significant contribution to corporate governance’. She argues that recent corporate collapses demonstrate why the general counsel role should be defined. She’s particularly alarmed at the cultural problems that contribute to misconduct and argues that corporate scandals demonstrate the relevance of lawyers in helping prevent bad practice. ‘There are environments where lawyers aren’t supported to do their job’, she says.

For Swallow, outlining in writing how business leaders should involve general counsel in areas such as risk management or audit would standardise best practice and remove any excuses not to seek their input. ‘The formally writing of it down will bring a practical focus and thereby a practical shift’, she says.

Abhijit Mukhopadhyay, Website Officer of the IBA Corporate Counsel Forum and President (Legal) & General Counsel at Hinduja Group, agrees it would be beneficial to stipulate the expectations of the general counsel role, which could be outlined in a document that sits alongside the Code. Currently, he says, ‘when you talk about [the general counsel], everyone has got their own idea’ about what the role entails.

According to Angélique Parisot-Potter, Executive Vice President, Business Integrity & Group General Counsel at the Massy Group, codifying the general counsel role could also provide security to those who want to stand up to corporate misconduct and make any discussion about the ethical application of the law easier.

Zoe Bucknell, Chief Executive Officer (CEO) and co-founder of Kuberno, a governance software-as-a-service developer, says the FRC proposals include amending its guidance on implementing the Code to recognise the general counsel. The revised guidance outlines that, in commenting on the effectiveness of the company’s risk management and internal control systems, the board should include when and how it has consulted a number of key executive stakeholders, specifically including the general counsel.

For Bucknell, this is the right place to reference the general counsel role rather than in the main body of the Code. ‘The legal function has a significant role to play as part of internal controls, but it’s not the only one,’ she says, highlighting the importance of internal audit, the chief financial officer and human resources staff, all of which are not specifically referenced in the Code.

In the UK public companies are required to appoint a company secretary and many private companies also appoint one. This role usually takes responsibility for corporate governance. The company secretary is specifically referenced in the Code, which states, ‘All directors should have access to the advice of the company secretary, who is responsible for advising the board on all governance matters. Both the appointment and removal of the company secretary should be a matter for the whole board’.

The Code also states that ‘The board, supported by the company secretary, should ensure that it has the policies, processes, information, time and resources it needs in order to function effectively and efficiently’.

In their response to the Code consultation, the general counsel signatories call for their role to be referenced alongside the company secretary position in these two areas of the Code. For them, this proposal highlights the different experience of general counsel and company secretary and how both contribute to good governance in different ways.

Swallow stresses the proposal is not about taking over the remit of the company secretary or creating conflict between the two functions. She says that ‘each role is critical and collaboration between them is very powerful – they face similar tensions’. Other commentators agree that the roles are complementary and should work together.

Some argue that the general counsel position isn’t a governance role at all. Bucknell is against including the role in the Code for this reason. She says the general counsel isn’t an officer of the company and that taking on that position would affect their independence as a lawyer. She also argues that the general counsel wouldn’t be sufficiently independent of the executive if they took on a significant governance remit akin to that of the company secretary.

…General counsel often feel conflicted between their obligations to their client who is also their employer and their professional obligation to remain independent. This ‘can be a difficult thing to navigate and needs governance around it,’ says Swallow.

Parisot-Potter highlights that pay structures incorporating performance-related bonuses can create a dynamic where in-house lawyers potentially lack the independence to advise against certain actions. This is because their bonuses, feedback and performance reviews are directly tied to the business, which could penalise them for giving advice, in the best interest of the client, against a particular course of action…

Parisot-Potter also emphasises the need for quality legal advice. ‘I do think it is [the in-house lawyer’s] role not just to make sure the business gets done but that it gets done in the right way,’ she says. According to Permut, ‘you have to have the goals of the business in mind and work with the business to do things obviously within the law, but which produce the best result possible from a business standpoint’.

Swallow says some lawyers are beginning to rethink what they as a community exist for and therefore what a lawyer in business is. She believes there’s a great opportunity for the wider legal community to consider their role in modern society. The response to the FRC consultation, alongside fellow signatories, is one aspect of this process.