Issues Posed By The Dodd-Frank Act In The Light Of General Counsel's Responsibilities

Tuesday, November 2, 2010 - 01:00

The Editor interviews E. Norman Veasey, Chief Justice of the Delaware Supreme Court (retired) and Senior Partner, Weil, Gotshal & Manges LLP.

Editor: You have been a great advocate of self-regulation, the importance of Sarbanes-Oxley, and the ethical rules governing attorney behavior. What are your views of the whistleblower bounty program provisions in Dodd-Frank?

Veasey: The whistleblower bounty program provisions in Dodd-Frank are very problematic. Among other issues, they seem to put boards of directors in a position in which it is very difficult for them to ensure that the workings of the internal compliance programs of their corporations are effective. The programs should be effective, and they are in most instances.

The problem with the whistleblower program is that there is an incentive for the whistleblower not to go through the corporate hierarchy, but rather to go outside and not give the corporation the opportunity to cure the problem. This is because the whistleblower has a financial incentive to be the provider of "original information."

The general counsel, as the persuasive counselor, needs to be in a position where she can ensure, to the extent possible, that the corporation remains in compliance with applicable laws. Presumably, the SEC will consider, in promulgating its regulations, that there will be an opportunity for internal correction by going up the ladder, as was contemplated by Sarbanes-Oxley and the ABA Model Rules of Professional Conduct.

When a lawyer knows that there is evidence of misconduct, that lawyer is obliged to report it to the general counsel or the CEO. In turn, the general counsel or CEO is required to take steps to investigate the problem and correct it. If that doesn't work, the lawyer is obliged to go up the ladder to the board of directors. If that doesn't work, the attorney then may go directly to the SEC. The attorney is obliged to go up the corporate ladder but not to go to the SEC. The compliance programs developed as a result of the Caremark case and Sarbanes-Oxley have been working and should be allowed to continue to work.

Having said that, the Dodd-Frank Act is what it is. The next step is for the SEC to consider these issues when promulgating its regulations. I would advise corporations to do a number of things in connection with the whistleblower program.

First, particularly under the guidance of the general counsel, corporations should take a fresh look at the company's codes of conduct, ethics, internal whistleblower procedures, and other components of the company's compliance program. They then can assess whether they appropriately have reduced the risk of violations and encouraged employees, executives, and directors to report internally suspected violations at the earliest possible stage.

Second, they should ensure that their codes and policies prohibit retaliation in line with the Dodd-Frank Act. They should reinforce the prohibition on retaliation in the company's compliance training programs.

Third, they should interact with the SEC to help shape the regulations soon to be issued. The regulations are due in April 2011, so there is really not a lot of time.

Editor: Please explain your dedication to self-regulation and the basis for that dedication.

Veasey: I believe that private ordering, self-regulation, and self-examination are the keys to the proper corporate governance solution to these problems.

First of all, you have to presume that general counsel and their in-house colleagues are honest and dedicated to doing the right thing. So, combined with the corporate codes of ethics and the ethics governing lawyers, there is a very good expectation that self-regulation and self-assessment will be useful in most instances.

The whistleblower provisions of the Dodd-Frank Act may interfere with and complicate that, particularly when you consider that there may be a rush by the whistleblower to report to the SEC to try to get this bounty. It is a significant bounty of 10 to 30 percent of any recovery over a million dollars. That is a strong incentive for people to circumvent the system and to be cynical about the opportunities for self-regulation. I'm not cynical about self-regulation, but the potential size of the award is a great temptation.

Editor: Do you get the feeling that general counsel, as a group, are dedicated to the concept of self-regulation and to the ethical rules you've described?

Veasey: The general counsel I've talked to are very committed to doing the right thing, both ethically and morally. It's in the best interest of the corporation, and it is the right thing to do - to ensure that there is a good compliance program. That seems to be working better and better all the time.

Editor: Are the law schools doing an adequate job in preparing future corporate counsel or outside corporate counselors?

Veasey: Obviously, law students will need to learn about corporate governance issues and the laws that address them, such as Sarbanes-Oxley and Dodd-Frank. They also need to be attuned to the challenges and tensions of the general counsel.

My concern is that not many people really understand what the general counsel does. The general counsel is, as Ben Heineman has said, a partner and guardian. She is a partner working with other senior management in developing business strategy and corporate transactions. She is the guardian of the corporate integrity, not only at the senior management table but also at the board table. As a partner and guardian, the general counsel is the persuasive counselor to ensure that ethics, morals, and the law are followed, and that the business strategy makes sense without incurring undue enterprise or reputational risks.

Editor: You have introduced our readers to the concept of the chief legal officer as a persuasive counselor. Would you talk about the dynamics of the role of the general counsel as a persuasive counselor?

Veasey: The general counsel has one client, the corporation. In turn, the corporation has a number of constituents, such as the CEO, other members of senior management, the board of directors, and the stockholders. Traditionally, the CEO has been the principal person responsible for hiring, firing and determining the compensation of the general counsel. Boards increasingly are participating in that process and playing a greater role in matters affecting the general counsel.

That is a good trend because the general counsel is truly a partner with management and the board in the business of the corporation, ensuring not only that corporate matters are legal, but also that the business strategy and the risks being taken make sense from a business point of view relative to the corporation's opportunities and its competitive environment. More and more CEOs are relying on general counsel, not only to tell them what's legal and if not, how to provide for a legal way to accomplish a result, but also in relying on the general counsel's judgment in determining whether something makes sense from a business point of view. In other words, the general counsel may need to tell her CEO that an idea may be "legal but stupid."

Wearing a different hat, the general counsel must reach out to the board of directors to ensure that the board understands not only the business of the company but also how a particular strategy fits into that business - that it makes sense from both a legal and a business point of view. Practically speaking, the general counsel will have to achieve the delicate balance of working both with the CEO and board of directors. If there is discord, that is a problem that the general counsel needs to address. So the general counsel is partner, guardian, and persuasive counselor.

Editor: Do you find that increasingly the general counsel meets with the board, independently and without other members of management present, at which time difficult questions may come up, such as any issue of compliance?

Veasey: Let me preface this by saying that I'm writing a book for Oxford University Press on the challenges and tensions of general counsel in the new reality. I am working with a coauthor who is a colleague of mine, Christie Di Guglielmo. We're hopeful that it will be published and available next spring.

In the course of writing that book, we have interviewed over 30 general counsel on a number of topics, one of which is how does a general counsel deal with the executive session of the independent directors of the board? Of course, it is expected that the general counsel will attend board meetings and be available to counsel the full board and committees of the board in regular session on corporate matters. It also is expected that independent directors at most meetings will have a separate private session when they talk among themselves. They should have the opportunity to have no member of management present, which is the norm, or to invite members of management to come in for a time on a particular topic or topics.

The general counsel is often one of those people who is invited for that part of the meeting when the independent directors want to ask her questions or give her information that is valuable to her in her partner, guardian, and persuasive counselor role. But, the general counsel does not regularly sit in the executive session of the independent directors unless invited to do so. In that instance, she normally is invited for only part of the meeting.

Editor: Has the enhanced status of general counsel affected the weight of her words with the CEO and the board?

Veasey: Yes. Increasingly general counsel have an elevated role from that which they had even five years ago. This is not only because of the complications of dealing with regulations, such as those mandated by Sarbanes-Oxley and Dodd-Frank, but also because of important accounting and other issues with which they need to be conversant. Activist investors are demanding more and more transparency and accountability, and the CEO in particular needs to rely on the general counsel and have her at his side for many things, including legal, policy, and business questions. So, the general counsel is an increasingly important point person in the overall corporate hierarchy and is part of what we call the C-suite of chief officers while also being the independent counselor to the board of directors. General counsel need to be conversant with all these complications, have the courage and independence to provide unvarnished and objective advice, and have the integrity to ensure that things are done right. She might have to resign if it's not done right. That creates a particular challenge for the general counsel who has only that one client.

Editor: Describe the role of in-house and outside counsel under Sarbanes-Oxley regarding the ethical rules in alerting management to evolving compliance issues that need to be nipped in the bud before a violation occurs. Is this in fact taking place?

Veasey: The role is important. There is always a tension between budgets and the desire of the legal department to have the necessary resources. Sometimes the legal department feels shortchanged in that effort and has to persuade management and the board of directors of the importance of strengthening the capability of the legal department. Part of that is what you call nipping in the bud violations before they occur by seeing to it, for example, that risk management and compliance assessments are created, implemented, and monitored to ensure that these problems don't occur.

Editor: Do you see that function as being somewhat different from the function of the chief compliance officer in terms of the ability to prevent something from happening rather than waiting until it simmers up into the consciousness of the compliance system?

Veasey: Their goals are the same. The general counsel and the chief compliance officer both are trying to ensure that the problems don't occur, and they create systems so they are unlikely to occur. Their roles are somewhat different in that the chief compliance officer has that as his primary responsibility, and the general counsel has other responsibilities. Many models are based upon the general counsel having some oversight responsibility for the chief compliance officer to ensure that things are done correctly.

Editor: All the points we've touched on would appear to be affected by the whistleblowing approach that Dodd-Frank unleashes.

Veasey: It certainly complicates the process, but I don't know that I can say broadly that it is necessarily counterproductive. I think the formation of the regulations should keep in mind that there is a benefit to self-regulation and adhering to internal private ordering and compliance programs. I think the whistleblower program complicates that, and I hope through regulation that the complications will be addressed.

Please email the interviewee at with questions about this interview.