Compliance Readiness The Changing Role Of Corporate Counsel In The Era Of Sarbanes-Oxley

Thursday, September 1, 2005 - 01:00

Editor: Mr. Feig, would you tell our readers something about your career?

Feig: I began my career in the 1980s with a large New York firm in a practice dedicated to counseling and litigating in the then-prevalent field of hostile takeovers and proxy contests. As this type of activity diminished in the 90s, the practice became more oriented toward traditional class action and derivative litigation defense work, although it required our group to maintain currency in all governance developments as we continued to counsel our corporate clients.

After a number of years I moved on to a smaller firm and, eventually, to Arent Fox. This was at the beginning of 2002 - in the early stages of Sarbanes-Oxley - just as the firm was expanding its activities in New York. My practice continues to balance counseling and litigation, with a particular focus on corporate and securities law. An involvement in both the transactional and operational dynamics of a corporation, and the related litigation that inevitably ensues, is invaluable for any corporate counselor who functions in the boardroom and executive suite of a corporate client. I like to think that I bring to my clients a heightened sensitivity to litigation prevention, compliance and risk management, and, if litigation cannot be avoided, an ability to take action without having to spend too much time learning about the client's business.

Editor: You mention Sarbanes-Oxley. What impact has that legislation had on your practice?

Feig: Putting this into an historical context, the litigation explosion of the late 80s and early 90s compelled Congress to try to curtail so-called strike suits through the Private Securities Law Reform Act. By that time, several pro-management doctrines had taken hold in corporate jurisprudence that served to enhance the protections available to corporate decision makers. All of this meant that momentum had shifted back to the boardroom in the midst of considerable economic growth.

In such an environment I suppose it was inevitable that a few unscrupulous insiders were able to fool shareholders, auditors, the regulators and even members of the governing board, all of whom were more than happy to see glowing reports of growth and profitability in the midst of an economic boom. It was equally inevitable that, in time, such misconduct would be revealed. Almost overnight some of the biggest success stories on Wall Street - including WorldCom and Enron - became synonymous with corporate scandal, and the effect cascaded across all public markets. When the Internet bubble burst, so did so many pension funds and, for the first time in history, the investors who suffered losses - measured now in billions of dollars - were not merely the sophisticated and well-to-do, but people of quite modest means whose retirement was now severely compromised.

Congress was compelled to act in such circumstances. The resulting statute goes far beyond an upgrade of market regulation and disclosure requirements, however. In penetrating the executive offices and board rooms of our corporations - the inner sanctum where conduct has been governed by state corporate laws and case law - Sarbanes Oxley constitutes a bold federally-mandated code of conduct, with penalty-driven accountability and compliance features, that affects both corporate insiders and the professionals who serve them.

How has Sarbanes impacted my practice? Well, it has resulted in a measurable increase in corporate anxiety and that, in turn, has resulted in a great increase in my clients' need for guidance. Most public companies have always played by the rules, whether embodied in federal securities laws or state law corporate governance principles. The federalization of this area, together with the imposition of stiff penalties for non-compliance, has served to increase the cost of being a public company. That is unfortunate.

Cutting the other way, Sarbanes-Oxley - while it is not going to change the way we do business in a fundamental way - has brought some light into some of the darker recesses of corporate life. That is a laudable goal, although it may unfairly "tax" the many corporations that have been good corporate citizens all along.

Editor: At some point the dust from the recent scandals will settle. When it does, is it possible this area of law will revert to what it was prior to Enron, WorldCom et al?

Feig: I am pretty certain that Sarbanes-Oxley is the first securities enactment that the man or woman on the street can identify by name. It has significantly raised the stakes for anyone seeking high corporate office or a place at the board table. Even if it largely codifies what was already present in terms of principles and rules of conduct, it has made a lasting impact. However, there is a pendulum here, and it is going to swing back, although not all the way. I believe that we will see a higher quality of board member, and a greater degree of vigilance, as a result of the statute, and that, in turn, is going to enhance the accountability of corporate executives and benefit the shareholders.

Editor: Please give us your thoughts on how Sarbanes has affected the role of general counsel in the corporate arena.

Feig: General counsel already had a full plate before Sarbanes-Oxley. Two years into the new framework, the role of general counsel remains vital, albeit with a few caveats.

First, as a practical matter, there is more to juggle: a new internal compliance and controls framework, new whistleblower rules and attendant reporting chains, new corporate governance rules, and, of course, additional traffic to direct in the form of external advisers, including lawyers. Even where the corporation had always observed the rules, there is a need for attention to detail, a focus on formalities, documentation, procedures and so on, all of which adds to the burdens of general counsel.

Second, there is greater emphasis on general counsel as a watchdog, and that, I believe, has created a new level of anxiety for many of the in-house lawyers who were traditionally viewed as corporate insiders and team members. While, as lawyers, corporate counsel were always governed by rules of professional conduct, Sarbanes Oxley added a new set of federal rules of professional responsibility. Many of the questions in the minds of general counsel today were not present in the past: Is the CEO going to view the general counsel as a member of the senior management team? Are the outside directors going to seek to have general counsel verify everything that management reports at board meetings? Can senior executives continue to expect that their discussions with general counsel are protected from disclosure under the attorney-client privilege? These are understandable concerns.

Editor : Is there an emerging "best practices" with respect to how general counsel guides the corporation into compliance with Sarbanes and the related regulatory framework?

Feig: I cannot speak for the industry generally, but we have certainly developed, and continue to develop, a list of what one might call "best practices" for our in-house counterparts. For starters, both in-house counsel and outside counsel are subject to the same rules of professional conduct, and we both owe an overriding responsibility to the corporation, and not just to its current management. There is a tension in this, of course, because we are dealing with real relationships - between a lawyer and the CEO and other senior executives - and not merely a set of rules. Nevertheless, most senior executives today recognize the particular duty that general counsel owes the corporation. That may be reflected in the fact that general counsel - in many cases a repository of institutional continuity and stability - often survive a change in corporate leadership.

I think it is good practice for the general counsel to foster lines of communication with all of the constituents with whom he or she has regular contact, senior management and members of the board, junior employees, and outside advisers. Having a primary loyalty to the corporation enables general counsel to occupy a middle ground - and see things from an objective and non-discriminatory perspective - that enhances the flow of such communication. The corporate hierarchy often inhibits communication of this kind, but corporate counsel is in something of a unique position and, assuming a willingness to listen, capable of transcending the hierarchy. That capability may be of great importance to the corporation.

Since the general counsel is, in all probability, the person best equipped to deal with Sarbanes-Oxley, he or she should have a significant role in designing and implementing the framework for ensuring compliance, including the careful management of information, document retention and destruction policies, e-mail and Internet policies, and so on. In addition, the documentation that evidences both the existence of internal controls and their effectiveness is something that requires the attention of general counsel.

At the board level, general counsel would be well served in having an intimate familiarity with the duties of the board and its committees, and this includes the management of the information that is disseminated to the directors and the conduct of meetings of the board and of board committees. If general counsel is not always present at such meetings, he or she needs to be aware of what transpires, and the documentation of these deliberations is something that should be a matter of his or her immediate concern.

Sarbanes-Oxley has imposed a new duty on outside counsel to report certain discoveries of potential wrongdoing "up the ladder," through in-house counsel, through senior management and possibly to the board or a committee thereof. Where there is long-standing institutional knowledge on the part of the outside lawyer - perhaps greater than that possessed by general counsel - the former might be placed in the unenviable position of having to compromise the relationship of candor and trust that should exist with general counsel and other senior executives. One of the things I have suggested to address this situation is for general counsel to have in mind a separate law firm to handle potentially sensitive matters, those that might compromise the general outside firm's ability to represent the corporation in day-to-day matters. Special counsel - without significant historical connections to the corporation and without, say, primary responsibility for SEC matters (and therefore not subject to the "up the ladder" provision) - is often in a far better position than the corporation's principal outside law firm to advise general counsel on such things as to whether a particular candidate for membership on a board committee possesses the requisite independence, the investigation of a potentially inflammatory claim of internal wrongdoing in a way that maintains attorney-client privilege, the negotiation of conflicting agendas among senior executives or between management and the board, and so on.

Editor: Since the passage of Sarbanes critics have said that they thought the governing board and senior management were coming to focus too much on process , to the detriment of the operational substance of the enterprise. Is there any truth to this?

Feig: State corporate governance rules always have emphasized process as well as substance in corporate decision making. I do not think Sarbanes-Oxley has meant that process preempts substance in the board room. The fact that directors are scrutinizing operations more carefully is a good thing, even though it may require management to put in longer hours of non-operational time to justify their proposals.

Editor: What about the future? Where is Sarbanes going to take corporate America over the next five years or so?

Feig: Judging from history, once everyone has absorbed the initial impact of this legislation, the new compliance and governance directives will become engrained in our corporate culture. Sarbanes-Oxley is not going to eradicate all corporate wrongdoing, but it should make it more readily detectible through greater transparency and accountability.

Please email the interviewee at with questions about this interview.