Letter From The President Of The Greater New York Chapter Of The Association Of Corporate Counsel-America

2004-02-01 01:00

To The Readers Of The Metropolitan Corporate Counsel

I would like to say a few words about trust.A recent article in the New York Times by Diana Henriques elicited the views of industry experts about the problems experienced by the mutual fund industry. New York Times, Jan. 2, 2004 at C1, col. 1.

Most of the commentators focused on trust, or more accurately, the breach of trust, by mutual fund managers.For example, one expert said that many managers had forgotten the most basic of mutual fund rules - "it's the shareholders' money."

The problem of breach of trust is not isolated to the mutual fund industry.A strong argument can be made that it is the root of the problems we have had in all recent corporate scandals, from Enron to Putnam.What does this say to corporate counsel?

In my view, breach of trust is a problem for corporate counsel.I do not mean that all corporate lawyers in those scandals were personally involved in self-dealing and other misconduct.What I mean is that they failed in their basic obligation to protect the shareholder's investment in the corporation. When the investment becomes worthless because of insider abuse or fraud, the corporate lawyer has failed in his duty.

More than a decade ago, in considering the failure of Lincoln Savings and Loan, Judge Sporkin asked "Where were the lawyers?"I do not think that is the right question now.The lawyers were not absent.We know the lawyers were present but they did not function.They were entrusted as key corporate controllers to protect the corporate client for the benefit of its shareholders.They did not control or protect.So, let me reframe Judge Sporkin's question.What made the corporate lawyers so dysfunctional?

In many situations, the lawyers' failure was foreseeable.For example, in Richard Breeden's report on the failure of Worldcom, he points to the Chief Executive Officer, Bernie Ebbers, and the corporate culture that Ebbers established.Ebbers showed disdain for corporate counsel, and ensured that lawyers, while employed by Worldcom, were ineffective.This highlights one very important challenge in corporate practice today: being sufficiently trusted by senior management to be brought into all of the company's significant decisions, but also being sufficiently independent in judgement to say "this cannot be done."Balancing these conflicting objectives is, in my view, the greatest challenge for a corporate legal officer.

There are various ways to test for lawyer inclusiveness and involvement.If the company has a risk management committee, as most financial institutions now do, is the chief legal officer a committee member?If not, there is good reason to make inquiry as to why.Today, legal and reputational risk is as important to the company as credit and financial risk.If no lawyer or compliance officer is involved in the risk committee, this suggests that the company has simply missed a major risk issue.A member of a board in such a company should send management back to the planning table, and do so quickly.

Another common problem relates to the corporate lawyer's position in the organization.If the chief legal officer is reporting not to the chief executive officer but to a mid-level corporate officer, that lawyer's position in the organization speaks volumes about his relative worth in the eyes of the management.If the chief legal officer is not considered valuable to the organization, this suggests either that the wrong person is the chief legal officer or that management has the wrong culture.The board needs to take action, whatever the situation.

A board member will want an empowered chief legal officer, because such a person will have a common interest with the director, to protect the shareholder's interest in the enterprise.It helps to expect that the chief counsel will bring a legal problem "up the ladder" to the board of directors, and I applaud the SEC for promulgating this rule, but we must be mindful of an important practical reality.If the climb up the corporate ladder is too difficult, through rungs of corporate officers whose career interests may lie elsewhere, it simply will not be attempted.For this and other reasons, the chief legal officer in a corporation should be close to the top, and report to the chief executive officer.

We need to focus on the chief legal officer's access to the board of directors.Does the chief legal officer attend board of directors' meetings?Is the chief legal officer known to the members of the board?Does the chief legal officer provide periodic briefings to the board of directors?Is the chief legal officer closeted from the board by the senior management?All of these questions should be asked and answered in an organization that wants to keep the investors' trust. I note that the ABA's Task Force on Corporate Responsibility advises the adoption of a practice where the chief legal officer regularly meets in executive session with a committee of independent directors.

Let me conclude with a reminder to myself and others, like me, who are privileged to serve as a chief legal officer.Those acting as chief legal officer for a corporation need to understand that the client is the corporation and that the lawyer's duty is to the corporation.More broadly, in protecting the corporate client, we carry out a trust by those who have invested in it, the shareholders.At all times, the corporate interest must be placed ahead of the lawyer's personal interest and the interests of all other corporate officers.This is what Cardozo meant when he spoke of an "honor the most sacred," and this is what must guide the corporate lawyer.

Of course, this does not mean the corporate lawyer can be a renegade in a "corporate" enterprise, because that lawyer is destined to be marginalized and

to become dysfunctional.In the end, it is all about trust.Our fellow corporate officers will include us because we have earned their trust.By exercising independent judgement, we will protect the corporation and keep the shareholder's trust.


Thomas C. Baxter