Shielding Corporate Counsel from Retaliatory Termination

My draft article, Blocking the Ax: Shielding Corporate Counsel from Retaliation as an Alternative to White Collar Hypercriminalization, recommends that the NYSE and Nasdaq amend their corporate governance listing standards to require that termination of a public company’s general counsel and lead outside corporate transactional and securities regulatory counsel be approved in advance by the company’s independent audit committee.

The article is written from the perspective of one who worked for many years in private practice as full equity partner at two major AmLaw 100 firms and during 2005-2006 served in a senior capacity with the Securities and Exchange Commission in Washington, D.C.

The immediate, first-order objective of the proposal is to create sanctuary for critical professional gatekeepers of public company reporting and legal compliance processes who desire to fulfill their function with integrity and honesty but who can be made subject to tremendous real world pressure to collude or acquiesce in intended corporate misconduct.

Such pressures do not arise where senior corporate business management operates within the rules, but rather in unfortunate cases where management is intent upon misconduct and  corporate counsel is unwilling to “play ball.” In those circumstances, counsel can face the prospect of retaliatory termination with all its grim attendant personal consequences.  It takes tremendous courage and determination to hold the line in the face of potentially severe or even catastrophic harm to one’s career, financial situation, and family.

Protection from potential retaliation has already been afforded to outside auditors by means of the Sarbanes-Oxley Act of 2002 and the massive 2003 amendments to the NYSE and Nasdaq corporate governance listing standards.  Yet similar protection was never extended to corporate transactional and securities regulatory counsel.

Requiring termination of such counsel to be approved in advance by a public company’s audit committee would create a firebreak in the ability of corrupt senior business managers to intimidate legal counsel who might otherwise advise and adhere to compliance with the law.  This use of checks and balances in the corporate governance structure would as a practical matter provide significantly improved prophylaxis against corporate misconduct.

A consequent reduction in the frequency and severity of major scandals related to corporate disclosure and compliance would in turn serve the second-order and ultimate objective of the proposal.  That objective is to slow the rate at which our society promulgates ever more numerous and punitive white collar criminal provisions.

Though we have experienced a long-term secular trend toward increasing federalization of criminal law, particularly white collar criminal law, the Sarbanes-Oxley Act represents a development of genuine historical significance.  Although often still not appreciated in its full import by the legal community, Sarbanes-Oxley in relatively few pages effected a radical sharpening of the white collar penalty structure.  Though effective in its primary purpose of punishing misconduct, draconian white collar penalties, like powerful chemotherapy drugs, carry the potential for nontrivial, adverse collateral consequences.

There is an alternative approach to preventing corporate fraud less fraught with potential long term cost to our society.  That alternative is the use of checks and balances in the corporate governance structure, specifically by requiring that termination of lead public company corporate transactional and securities regulatory counsel be approved by the company’s audit committee.

The article argues in favor of implementing the reform by means of an amendment to the corporate governance listing standards of the NYSE and Nasdaq.  It explains why this approach is preferable to seeking reforms in Delaware or in federal regulation.  A draft text of an amendment is set forth.

The full Article can be found here.