CORPORATE GOVERNANCE

CORPORATE ETHICAL CONDUCT
A role for corporate counsels

“We are now responsible for delivering legal advice, being effective managers, serving as the conscience of the corporation, and beyond that, giving strategic business advice”.
- Barry Nagler, Chairman, Association of Corporate Counsels, America

Robert Clive’s contributions to the failure of the British East India Company, Nick Leeson the rogue trader forcing the collapse of Barings Bank, and Kenneth Lay’s strategies that resulted in Enron’s demise all suggest that financial audit and risk management systems alone are insufficient in preventing corporate failures.

Michael Power, Professor of Accounting at the London School of Economics and Political Science in his book, “The Audit Society – Rituals of Verification” states, “…the official procedural knowledge base of auditing has evolved in response to scandals and corporate failures in such a way that the essential puzzle of what audits produce – their effectiveness – remains hidden from view as an article of faith.”

The Report on Corporate Governance by the Malaysian High Level Finance Committee states, "The board should receive information that is not just historical or bottom line and financial oriented but information that goes beyond assessing the quantitative performance of the enterprise and looks at other performance factors …"

How do we balance the aspirations of businesses and stakeholders for economic prosperity and justice within the global market place? It has been said that the role of the law is supplementary to insurance and the underlying economic concept of risk management. However, for an equitable and fair market, legal principles must trump both financial auditing and risk management principles in the governance of corporations.

Enron was a corporation that appeared to have all the modern management tools of financial audit, risk management and even a code of conduct. Unfortunately their own internal code was apparently not applied to the transactions that ultimately affected the bottom line.

The stakeholder approach to corporate governance suggests balancing the interest of all stakeholders by considering the potential harms and benefits of a proposed plan of action on each party. The stakeholders should include; directors, managers, employees, shareholders, consumers, suppliers, regulators, and the affected community.

In taking into account the stakeholder during the business decision making process the issues that must be addressed are: legality within the respective jurisdictions of operation; compliance with global industry standards; compliance with standards set by the company’s leadership; and, acceptance of the business decision by the wider community not privy to any resulting commercial contract.

A useful tool for addressing the above is the “Code of Corporate Compliance and Ethical Conduct” (the Code) to focus business decision making and organisational behavior on the necessary standards of care.

The realization must be that a breach of the Code could result in legal liabilities and/or a corporate disaster. The jurisprudence must be that the fundamental rights reflected in the Code must trump business convenience in a global economy.

The in-house lawyer’s privilege may help corporations create “space for privileged, private and confidential advice” for internal self-regulation and solution by the board of directors hence fulfilling the essence of corporate governance.

The US Supreme Court explained the rationale for the attorney-client privilege in Hunt v. Blackburn (1888), observing that the privilege is "founded upon the necessity, in the interest and administration of justice, of the aid of persons having knowledge of the law and skilled in its practice, which assistance can only be safely and readily available of when free from the consequences or the apprehension of disclosure.”

In the case of Arthur Andersen LLP v. United States Rehnquist, C. J. in delivering the unanimous decision of the US Supreme Court stated, “The jury instructions failed to convey the requisite consciousness of wrongdoing. …. A “knowingly . . . corrupt persuader” cannot be someone who persuades others to shred documents under a document retention policy when he does not have in contemplation any particular official proceeding in which those documents might be material.” 

This stresses the importance for corporations to have clearly written policies, guidelines and codes that instruct employees on what constitutes right action and behavior.

In the context of the above analysis, the Code could contribute towards the company becoming a self-sustaining and self-regulating centre for human and financial profit with the corporate counsel assuming the role of chief compliance officer to compliment the chief financial officer and chief operating officer in advising the board of directors on corporate governance.   
 
Siddha Param
International Business Consultant
www.worldwidebusinessconnection.com
Your connection to global markets!
Winnipeg, MB, Canada, North America

First written in 2007