Editor: What legal principles protect directors?
Veasey : In my view, it is very important for the general counsel and her in-house counsel to guide the directors as they perform their duties and to assure them when they have the protection of the Business Judgment Rule and other protections provided by law; for example, the exoneration for due care violations and the protection that directors have in reliance in good faith on management reports and experts. Those are the fundamentals. Directors need to be counseled to follow best corporate practices.
Editor: Can you identify a source for best corporate practices?
Veasey: The Corporate Directors Guidebook , Fifth Edition, has just been published. It can be obtained from the Section of Business Law. It also has been published in The Business Lawyer and can be found at Volume 62, Number 4, August 2007. The Guidebook is intended to be guidance for members of boards of directors or prospective members of boards of directors who are not lawyers. So it is written in language that does not require a legal degree.
The new Fifth Edition of The Corporate Directors Guidebook follows very closely after the 2004 Fourth Edition. The 2004 Fourth Edition focused largely on the Sarbanes-Oxley Act and issues relating to compliance. The forward of the Fifth Edition, says that the Fifth Edition assumes these compliance issues "as a baseline and urges boards of directors to rebalance their priorities to focus on business performance."
If the importance of compliance with the law was the theme of the Fourth Edition, the theme of the Fifth Edition is stated on page 1482 to be "the increasingly vital role that directors play in protecting investors' interests and in directing or overseeing corporate strategy and its execution by senior officers." That's found on page 1482 of the Fifth Edition.
Of course, the Fifth Edition talks about compliance and the role of the lawyer and lays out the Business Judgment Rule, the legal obligations of the duty of care and the duty of loyalty, the duties of disclosure, confidentiality, risk and compliance oversight and the like.
The Fifth Edition lays out best practices in carrying out a director's responsibilities. If directors follow the best practices in the Fifth Edition, they need not fear that they will be found liable. It is up to the general counsel and other in-house counsel and outside counsel to guide them in the application of those best practices.
Editor: Do you visualize the general counsel as a kind of gatekeeper in guiding the directors?
Veasey: If the general counsel is viewed as a gatekeeper, that misses the mark a bit.
First, auditors are gatekeepers in the sense that they can effectively bar the use of an accounting treatment of a particular financial matter. It's a "go" or "no go" kind of thing. But the most important role of the general counsel is not as that kind of gatekeeper; general counsel's function is to act as a "persuasive counselor" who advises the board of directors and senior management of their responsibilities to engage in best practices, to comply with the law and to act in good faith. General counsel's advice is frequently judgmental and based on experience with similar situations. Directors should feel comfortable following the advice of general counsel because of their trust in the general counsel's judgment.
Second, in their roles as persuasive counselors, the general counsel is in some sense the conscience of the corporation in trying to ensure that the board of directors and senior management do the right thing. I don't think that the general counsel or the outside counsel should have a litigation target on their backs if something bad happened on their watch simply because they are considered to be the conscience of the corporation.
Editor: Does the involvement of the board in the selection of the general counsel, contribute to the general counsel's ability to act as persuasive counselor?
Veasey : The general counsel is the key to assuring that the corporation's legal responsibilities are met. Those legal responsibilities will be effectively discharged if the need to do so is recognized by senior management and the board of directors. This is most likely to occur if the general counsel has their full support. So the general counsel must be selected from among lawyers with outstanding talents whose advice is most likely to be heeded by senior management and the board. This requires the board's involvement in the selection process to assure their satisfaction with the person selected.
The best model is what was recommended by the American Bar Association Task Force on Corporate Responsibility, which can be found in The Business Lawyer at Volume 59 beginning at page 145; namely, that public corporations should adopt practices in which the selection, retention and compensation of the corporation's general counsel are approved by the board of directors.
Editor: Once selected, what kind of relationship should the general counsel have with the board that will enable the general counsel to act as its persuasive counselor?
Veasey: The second recommendation of the ABA Task Force on Corporate Responsibility Report is that the general counsel meet regularly and in executive session with the independent directors to answer questions and to communicate concerns, including those regarding legal compliance matters, such as potential or ongoing material violations of law by, and breaches of fiduciary duty to, the corporation.
The independent directors should request that counsel be present at almost all of their sessions, except possibly when they have a particularly sensitive executive session where no other member of senior management would be present. Those should be quite rare. The general counsel must inspire trust on the part of independent directors so that the general counsel is their persuasive counselor on a regular and daily basis. If the general counsel does not enjoy that trust, there is a serious question whether she should be retained. As far as being secretary when they meet separately, that's a good model, but it is not the only model. The new Corporate Directors Guidebook has a very good section on minutes and notes, which can be found at 62 Bus. Law at 1510-12.
Editor: To what extent is the general counsel's value as persuasive counselor enhanced by her superior access to information?
Veasey: The third thing that the ABA Task Force on Corporate Responsibility recommends is that all reporting relationships of inside and outside lawyers for a public corporation establish at the outset a direct line of communication with general counsel through which these lawyers are to inform the general counsel of material, potential, or ongoing violations of law by, and breaches of fiduciary duty to, the corporation. This is discussed at page 161 of Volume 59 of the Business Lawyer .
It is very important that the general counsel be in the loop on compliance issues and that the legal staff that reports to the general counsel should understand their duty to keep the general counsel in the loop on a continuing basis.
But keeping the general counsel in the loop is not enough, it is also important that the law department either include lawyers skilled in law and accounting and capable of understanding the nature of their company's products and services no matter how technical or, if that is not the case, at least have the ability to know when an issue should be referred to skilled outside counsel.
It is very important that the general counsel have sufficient understanding of complex matters that may come before the senior management or board so that she can counsel them effectively.
Editor: Should the general counsel be among top executives of the company?
Veasey : There is no one-size-fits-all. There are many corporate models, but it is certainly true that the general counsel should be among the top executives in the company and should have access to all meetings of senior management as well as those of the board.
Editor: What should the general counsel do if he or she has been forbidden to discuss information with the board?
Veasey : If it falls within the parameters of Model Rule 1.13 or the SEC rules in Part 205, then the general counsel may have to take it to the board. But she should first tell management that is the direction in which she is going and see if the intention to take the issue to the board results in a behavior modification on the part of the CEO or senior management. Model Rule 1.13, for example, simply says that if the lawyer knows that any officer, employee or other person associated with the organization is engaged in action, and intends to act or refuses to act in a manner, that is a violation of her legal obligations to the organization or is a violation of law that might be imputed to the organization and is likely to result in injury, then the lawyer has to proceed as is reasonably necessary in the interests of the organization - and that may mean that the lawyer has to go up the ladder to a committee of the board or the board itself. Part 205 is more exacting for lawyers appearing or practicing before the SEC. It requires in Section 205.3(b) up-the-ladder reporting by a lawyer who "becomes aware of evidence of a material violation"
Editor: Have you found a change in the attitudes of the CEO with respect to the lawyers in the company?
Veasey : In the companies that I have been working with, the CEO has great respect for the general counsel and listens to her advice. I haven't really seen the other side of that where the CEO denigrates the role of the general counsel. I'm told that there are such situations. That's too bad. It is important for companies to have a culture of respect for the legal staff in general, both in-house lawyers and outside counsel. If managers are not satisfied with the legal staff, they need to look into whether these lawyers are doing the right thing, and seeing that there is the right "tone at the top."