Who is your Daddy? – The Mistake of Corporate Counsel Representing the C-Suite Members and the Company

Corporate Governance

I recently attended a highly regarded get-together in New York involving in-house corporate counsel and representatives from the Department of Justice. The focus of the meeting, as usual, was on the Department’s continuing efforts to go after corporate executives and put more of them in jail for regulatory-type activity involving the sort of judgment calls that need to be made every day. I was most shocked, though, by some of the comments made by corporate counsel of some highly regulated companies.

The lawyers noted that they often represent both the company and individual employees in connection with litigation and government inquiries. I was shocked by how cavalierly these counsel treated the subject matter and the lack of any consideration of the horrific outcomes that can result from such joint representations.

In one sense, I can understand how these circumstances can arise, given the nature of the relationship between counsel and C-Suite members. C-Suite members share a common (and incorrect) perception that the corporation’s general counsel is also their personal lawyer. After all, the general counsel may regularly consult with C-Suite members about a slew of issues, ranging from employment issues, to compensation matters, and even to quasi-personal questions. The general counsel, rightly so, is regarded as a trusted advisor and the go-to person for legal advice within the C-Suite. Nothing I say is intended to diminish the trust and faith that C-Suite members should have in their general counsel.

But—and here is the big but—the nature of the relationship is often misunderstood and shrouded with conflict of interest issues. These conflicts could lead to the disclosure of information once thought to be confidential, including communications between counsel and C-Suite members.

First, the legal stuff: under operation of law, corporate counsel represents one client and one client alone: the corporation. Counsel’s loyalty is to that entity, not to the employees of the company, not even to those in high levels of management. This legal principle operates because, in many instances, corporate counsel may have provided business advice or guidance regarding the very matters under review. This creates potential conflicts between the lawyer’s interests, the corporation’s interests, and the C-Suite members’ interests. In other cases, the activities of a C-Suite executive might conflict with the perceived broader interests of the company. In these circumstances, the lawyer will be torn between representing the individual and the company. No C-Suite member should ever want to rely on a conflicted lawyer. Indeed, there are messy cases all over the place where one lawyer has tried to represent multiple clients despite clear conflicts of interest.

More ominously, the presumably confidential conversations between the corporate counsel and C-Suite members may not remain confidential forever. The board of directors, new management, or a government investigative agency may demand emails, memoranda, etc., potentially revealing sensitive discussions between corporate counsel and a C-Suite executive. More often than not, they get them under a variety of legal theories.

Let’s take one quick practical example: a company receives an informal inquiry from the SEC regarding the trading activity of the CEO. The CEO goes to the general counsel and asks her to handle it. The general counsel, who was involved in putting together a corporate insider trading plan, including the planned sales of corporate stock, says: “sure, I’ll take care of it.” The CEO decides against hiring his own lawyer, thinking that it would be a big waste of money. Huge mistake.

Why? Well, the general counsel may be concerned about her own decision-making and the advice she gave to the CEO. In addition, the CEO may have made certain personal judgments that could be second-guessed by the company’s audit committee or board of directors. It is not unusual for the audit committee to review issues such as these with the assistance of outside counsel that represents the company exclusively. Outside counsel will undoubtedly ask for all communications between the general counsel and the CEO. Also, down the road, the company may make the decision to share those communications with the SEC, leaving the CEO completely exposed to potential liability. This scenario is not unheard of. Having the general counsel represent both the CEO and the company is an invitation to disaster.

If all that is not enough, it is fair to say that the Department of Justice does not regard the general counsel’s relationship with the C-Suite to be a barrier to the gathering of information. In a recent case, the Department had a general counsel wear a wire to record possible incriminating conversations with his company’s CEO concerning allegations of overseas bribery. The tapes led to the indictments of numerous C-Suite executives. Shocking? Well, these are the times we live in.

So, what’s the answer? I believe strongly that C-Suite members, including general counsel, need to develop confidential relationships with their own outside counsel, separate and apart from the company’s legal counsel. These legal advisors need to be called upon for independent legal advice, within the individual attorney-client relationship, to avoid the chance of future disclosure. Only then will C-Suite executives reap the full benefits of legal advice.

 

Remember, be careful out there.

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