This post comes from Michael W. Peregrine, a partner in McDermott Will & Emery. Mr. Peregrine advises corporations, officers and directors on matters relating to corporate governance, fiduciary duties and officer/director liability issues. His views do not necessarily reflect the views of McDermott Will & Emery or its clients. Mr. Peregrine wishes to thank his colleague, Kelsey Leingang, for her assistance in the preparation of his post.
The general counsel should be proactive in reclaiming her traditional role as an adviser on organizational ethics, in addition to her accepted roles as legal counselor and business partner. Legal scholars, industry observers and the Rules of Professional Conduct collectively recognize the contributions made by general counsel to maintaining an institutional culture of integrity. Yet, the compliance industry has in recent years moved aggressively to assert exclusive responsibility for organizational ethics, to the direct exclusion of the general counsel. Such exclusivity denies to corporate leadership the unique ethical perspectives of the general counsel. It should not be tolerated by the governing board, which should be able to seek multiple ethical perspectives.
This is not an executive suite “turf battle”, nor an attempt to denigrate the important contributions of the compliance officer. Rather, it is an effort to assure to corporate leadership full access to the general counsel’s broad based skills and perspectives. These include the ability to advise on ethical and moral considerations–as the Rules of Professional Conduct clearly anticipate.[i] Indeed, the general counsel has long been viewed as a “guardian of the corporate reputation”.[ii] This expansive description is supported by multiple new surveys that attribute to the general counsel significant responsibilities, extending beyond the purely legal.[iii]
However, efforts by compliance industry leaders to expand the compliance officer portfolio are creating boardroom confusion on the proper role of the general counsel.[iv] This confusion extends to the question of whether the compliance officer or the general counsel is the primary or exclusive organizational advisor on ethics and integrity. At a time when the organization’s need for ethics advice is at a premium, the concern is that leadership may unwittingly turn exclusively to the compliance officer for guidance. The general counsel risks being outflanked by the compliance officer on this critical role. In the current regulatory enforcement/litigious environment, that is not a sustainable position for either the organization or its leadership. The board in particular should not be limited in its choice of advisors on matters of ethics and integrity.
The Compliance Industry View
The compliance industry’s overarching position is reflected in its increasing use of the title, Chief Ethics and Compliance Officer (“CECO”). The title reflects a perspective that the “CECO” position incorporates duties as ethical culture leader. Compliance thought leaders make three main arguments why the “CECO”, and not the general counsel, should have responsibility for organizational ethics direction:
Their first argument is that compliance officers are the “subject matter expert” on ethics and culture; i.e., “the eyes and ears of the board–and another check and balance against information carried into the boardroom by select officers and experts.”[v] This view is apparently grounded in a broad interpretation of the compliance officer mandate to prevent and detect misconduct;[vi] e.g.:
The CECO is the one individual in the organization who, as subject matter expert, should lead the steady, consistent charge for transparency and accountability that are the umbrella and safety net of the compliance program. Because if not the CECO, then whom? [emphasis added].[vii]
Their second argument is that the Rules of Professional Conduct provide no assurance that the general counsel will make ethically correct decisions; e.g.:
We [compliance industry observers] also note the recurrent use of ‘straw man’ arguments to distract from the real issues (‘Who are you calling unethical? Ethics is at the core of all we do! We have a code of professional responsibility!’)[viii]
Really?…When was the last time that a GC, before deciding to ‘hush up’ an internal bribery investigation…consulted his professional code for guidance? Should an internal whistleblower have confidence that a professional code will stop an in-house counsel from retaliating against that very whistleblower? …[w]hat does the professional code tell lawyers about a need-to-know list for investigations [or].. the cultivation of ethical leadership…?[ix]
Their third argument is that by their nature and personality, compliance officers possess a unique degree of rectitude; e.g.:
Compliance officers are often the least political, least power hungry folks at the company holiday party. It may sound cliché, but most CCOs are driven by their own internal desire to ‘do the right thing’…[x]
You know a successful Chief Ethics and Compliance Officer when you meet one. You can see it in the way they carry themselves, the way they speak and the way they interact with people in the company…[xi]
[Compliance officers] don’t discuss whether or not the regulation is fair. They don’t break the law because everyone else is doing it. They ignore peer pressure. They are not responsible for the net profit or conflicted in any other way. . . . They don’t promulgate excuses or rationalize behavior.[xii]
The unfortunate but unmistakable inference is that general counsel do not possess similar traits.
A More Inclusive Approach
These arguments dismiss the fundamental influence and authority of the Rules of Professional Conduct on the actions of the general counsel. The threat of disciplinary proceedings casts fear into the heart of every sane practitioner; the potential loss of licensure threatens the lawyer’s very livelihood. There also exists the very real risk of conduct-driven sanction, prosecution or liability by or from regulatory agencies (e.g., SEC, DOJ). What greater motivation to act in a professional appropriate manner could possibly exist? These thought leaders also dismiss the reality that compliance officers can be, and are not infrequently, sanctioned for misconduct.[xiii] Such sanctions (and similar enforcement actions) debunk the assertion that, unlike general counsel, CCOs are somehow ethically infallible.
The arguments also ignore the extent to which the general counsel is specifically empowered to provide ethical and moral advice under the Rules. Notably, Rule 2.1 (“Advisor”) provides that “in rendering advice on behalf of a client, a lawyer may refer not only to law, but to other considerations such as moral, economic, social and political factors [emphasis added] that may be relevant to the client’s situation.”[xiv] More foundational references can be found in the summary of the lawyer’s responsibilities set forth in the “Preamble” to the Rules; e.g., the lawyer’s basic obligation to always act in the best interests of the organization, his/her role as an officer of the legal system; as a public citizen having a special responsibility for the quality of justice; and the need to be guided by “personal conscience and the approbation of professional peers”.[xv]
Finally, the arguments are contrary to the long standing public and academic discourse that frame the lawyer’s role as a leading protector of the corporate reputation. Prominent scholars, practitioners and governance observers attribute to the general counsel the responsibility to address not only the question of “what is technically legal”, but also the sometimes more pressing question of “what is right”.[xvi]
In addressing the latter question, the general counsel is compelled to consider not only the law’s intent, but also the organization’s reputation, and matters of public policy and the expectations of society.[xvii] “It is ludicrous to suggest, as some do, that the GC only worries about what is ‘legal’ and the chief compliance officer worries about what is ‘right’”[xviii] [emphasis added]. Indeed, consideration of the “what is right” matrix is central to the “wise counselor” role often attributed to the general counsel by the estimable Benjamin W. Heineman, Jr. (the long time Senior Vice President for Law and Public Affairs at General Electric).[xix] This perspective has been thoughtfully expanded upon in two recent, important publications authored by leading legal experts in corporate governance.
In their highly regarded book, The Indispensable Counsel, authors E. Norman Veasey (the former Chief Justice of Delaware) and Christine T. Di Guglielmo describe the general counsel as “the guardian of the corporate integrity”.[xx] They view the general counsel as a leader in:
[M]onitoring and promoting ethical conduct throughout the entire organization…having a key role in promoting a corporate culture and environment in which actors throughout the organization make decisions on doing the right thing at every level.[xxi]
This characterization has the general counsel leading (along with others) organizational efforts to develop an ethical culture while pursuing efforts to strengthen the company’s business environment.[xxii]
Similar perspectives are expressed in the recent, prominent essay, Lawyers as Professionals and as Citizens: Key Roles and Responsibilities in the 21st Century, published by the Harvard Law School Center on the Legal Profession. Its authors include the aforementioned Mr. Heineman, Jr., two prominent private practitioners (William F. Lee and Felicia H. Ellsworth of WilmerHale), and a well know law school professor (David B. Wilkins of Harvard Law’s Center on the Legal Profession). The purpose of the essay is to present “a practical vision of the responsibilities of lawyers as both professionals and as citizens at the beginning of the 21st century.”[xxiii] The authors approach these responsibilities from various perspectives: corporate legal departments, large law firms and leading law schools. These perspectives are based on the key proposition that lawyers serve three distinct yet overlapping roles: technical expert, wise counselor and effective leader.
It is in the “wise counselor” role that lawyers are called upon to ask the “is it right?” and “what should we do” questions (in addition to the technical “is it legal?” question that arises in the context of the “technical expert” role).[xxiv] To the authors, the “wise counselor” role includes looking beyond what is the “right” course of action under prevailing facts, law and circumstances to consider reputational, moral and ethical factors, among several others.[xxv] Contrary to the “subject matter expert” perspective of compliance industry leaders, lawyers do not, in their “wise counselor” role, have a “monopoly of expertise” on these extra-legal factors.[xxvi] The authors specifically apply the “wise counselor” role to the general counsel:
The General Counsel should also have a broad scope beyond law to include ethics [emphasis added], reputation, and geopolitical risk and should function as expert, counselor, and leader to assist the board and business leaders in establishing an integrity culture in the institution. The General Counsel and all inside lawyers should aspire to be “lawyer-statespersons” who ask first “is it legal” but ask last “is it right”, and who can resolve the central tension of being both a partner to the business leader and the ultimate guardian of the corporation’s integrity.[xxvii]
This “guardian”/”wise counselor” characterization of the general counsel is particularly compelling because it reflects the thoughtful views of a broad cross section of the legal community—the judiciary, private practitioners, in-house counsel and academics.[xxviii] It is a characterization that the governing board should embrace.
It may be that the broader debate on the respective roles of general counsel and compliance officer will never be fully resolved.[xxix] Indeed, there should be no question that the compliance commentators are proceeding in good faith, and with the organization’s best interests solely in mind. There should also be no question that the compliance officer’s views on ethical matters should be sought by corporate leadership. But that does not mean that the vital role of corporate and board adviser on ethics, integrity and organizational reputation should be conceded exclusively to the compliance officer.
This debate is unfortunate; it constitutes “frictional cost” for the organization and is a distraction from more pressing corporate concerns. Yet, the aggressive efforts by the compliance industry to expand their traditional role have dangerously blurred the distinction between the roles of compliance and legal. It is, ultimately, the responsibility of the governing board to establish role clarity, and reduce the potential for organizational risk. The failure to clearly delineate the respective duties of these key corporate officers is likely to lead to administrative waste and inefficiency; increased internal confusion and tension; and the establishment of false distinctions between “compliance” and “legal”. More particularly, it could cause corporate leadership to turn to the compliance officer to resolve an issue that is legal in nature, or to consult the compliance officer (to the exclusion of the general counsel) on issues relating to the ethics or morality of particular decisions or conflicts.[xxx]
The board should forcefully assert its right to consult with the general counsel, as well as with the compliance officer and other qualified persons within and outside the organization, on the matters of organizational ethics, integrity and reputation. Such practice will enhance the informed exercise of the board’s fiduciary duties.
[i] American Bar Association, MODEL RULES OF PROF’L CONDUCT R. 2.1.
[ii] Ben W. Heineman, Jr., The General Counsel as Lawyer-Statesman, HARV. LAW SCHOOL PROGRAM ON THE LEGAL PROF.: A BLUE PAPER (2010) (Henceforth, “Heineman, Jr., ‘Blue Paper’”); see also Benjamin W. Heineman, Jr., “Don’t Divorce the GC and Compliance Officer”, The Harvard Law School Forum on Corporate Governance and Financial Regulation, December 26, 2010 (Henceforth, “Heineman, Jr., “Don’t Divorce’”).
[iii] See, e.g., Michael W. Peregrine, “New Surveys Find Increased Prominence for General Counsel”, Health Lawyers Weekly, American Health Lawyers Association (June 6, 2014); Michael W. Peregrine, “Seeking Clarity at the Crossroads of Legal and Compliance”, Corporate Counsel (Online) (September 18, 2014).
[iv] See, e.g., Michael W. Peregrine, “Compliance or Legal? The Board’s Duty to Assure Clarity”, The Harvard Law School Forum on Corporate Governance and Financial Regulation, August 12, 2014; Michael W. Peregrine, “Encroachment: Efforts to Limit the Role of In-House Counsel”; Health Lawyers Weekly, American Health Lawyers Association (May 16, 2014).
[v] Donna Boehme, “Mind the gap–and the ‘E’ in CECO”, Compliance & Ethics Professional (October, 2014 at p. 13) (Henceforth “Boehme, “Mind the gap’”). Author’s note: Ms. Boehme is a well-respected compliance industry advisor.
[vi] Donna Boehme, “Making the CCO an Independent Voice in the C-Suite”, Corporate Counsel (Online) (March 19, 2013) (Henceforth, “Boehme, ‘Making the CCO’”).
[vii] Boehme,”Mind the gap”, supra n. 5.
[viii] Donna Boehme, “Compliance in the Spotlight: Keep Calm and Soldier On”, Corporate Counsel (Online) (April 22, 2014) (Henceforth, “Boehme, ‘Compliance in the Spotlight’”).
[ix] Donna Boehme, “When Compliance and Legal Don’t See Eye to Eye”, Corporate Counsel (Online) (May 8, 2014).
[x] Boehme, “Making the CCO”, n. 6, supra.
[xi] Michael Volkov, “Five Important Traits for a Successful CECO”, JDSupra Business Advisor, August 26, 2014. Author’s Note: Mr. Volkov is a highly respected commentator on the confluence of matters of law and corporate compliance.
[xii] Roy Snell, “Letter from the CEO”, Health Care Compliance Association (December, 2009 at 18) (Henceforth, “Snell Letter”). Author’s note: Mr. Snell is the highly regarded CEO of the Health Care Compliance Association and is responsible for many valuable and lasting contributions to the compliance function.
[xiii] See, e.g., Comments of Andrew Ceresney, Director of Enforcement, Securities and Exchange Commission, available at http://www.sec.gov/News/Speech/Detail/Speech/1370541872207; Kara M. Stein, Commissioner, Securities and Exchange Commission, Keynote Address at Compliance Week 2014 (May 20, 2014), available at http://www.sec.gov/News/Speech/Detail/Speech/1370541857558. See, also Brian L. Rubin and Katherine L. Kelly, May – June 2014: Not Quite the Hunger Games: Chief Compliance Officers and In-House Counsel Fighting for Their Lives in SEC and FINRA Disciplinary Actions (July-December 2013), http://www.wolterskluwerfs.com/pcrmsi/may-june-2014.aspx; Brian L. Rubin and Katherine L. Kelly, CCOs and In-House Counsel Who Got Whacked: SEC and FINRA Disciplinary Actions Against Chief Compliance Officers and In-House Counsel (January–June 2013), Practical Compliance & Risk management for the Securities Industry (Sept.-Oct. 2013), http://www.sutherland.com/portalresource/lookup/poid/Z1tOl9NPluKPtDNIqLMRV56Pab6TfzcRXncKbDtRr9tObDdEn4ZCmO3!/fileUpload.name=/Rubin-Kelly%20Article%20-%20CCOs%20and%20In-House%20Counsel%20Who%20Got%20Whacked%20%28September-October%202013%29.PDF.
[xiv] N. 1, supra.
[xv] American Bar Association, MODEL RULES OF PROF’L CONDUCT: Preamble and Scope.
[xvi] See, e.g., Heineman, Jr., “Blue Paper”, n. 2, supra; see also Leonard Bucklin, “More Preaching, Fewer Rules: A Process for the Corporate Lawyer’s Maintenance of Corporate Ethics”; 35 OH. N.U. L. Rev. 887 (2009).
[xviii] Heineman, Jr., “Don’t Divorce”, n. 2, supra.
[xx] E. Norman Veasey and Christine T. Guglielmo, The Indispensable Counsel: The Chief Legal Officer in the New Reality (Oxford University Press, Inc., 2012) (p. 97-105).
[xxi] Id., at 100.
[xxii] Id., at 5.
[xxiii] Ben W. Heineman, Jr., William F. Lee and David B. Wilkins, Lawyers as Professionals and as Citizens: Key Roles and Responsibilities in the 21st Century, Harvard Law School Center on the Legal Profession (2014), at. p.5.
[xxiv] Id., at 9-10.
[xxvi] Id., at 10.
[xxvii] Id. at 6; 22-24.
[xxviii] Compliance industry thought leaders who are serious about working in concert with their general counsel counterparts–and there are many such leaders–are advised to read both the Veasey/Guglielmo and Heineman, Jr./Lee/Wilkins publications, as they represent the leading scholarship on the responsibilities and unique challenges of in-house counsel.
[xxix] This debate also includes issues relating to the supposed independence of the compliance officer, and the potential for loss of the attorney-client privilege from certain actions and conduct of the compliance officer. See, e.g., Michael W. Peregrine, “New Guidance on Compliance Officer Independence”, AHLA Weekly, American Health Lawyers Association (October 31, 2014); R. William “Bill” Ide and Crystal J. Clark, “The Chief Legal Officer’s Critical Role in the Compliance Function”, CORP. L & ACCOUNTABILITY REP. (June 27, 2014).
[xxx] The Ide and Clark article (n. 30) confirms with great precision the pre-eminent relationship of the general counsel to the compliance program. It clarifies the need for the chief legal officer to have ultimate responsibility for making legal determinations concerning an entity’s compliance with laws. It argues persuasively why the forced separation of the legal officer from the compliance function “is an unwarranted intrusion into a company’s legal risk management and acts to deny the company its right to counsel.”