Your law firm has an opportunity to reframe its relationship with GCs

Three challenges

Based on my experiences working with GCs and boards I see three challenges confronting law firms selling to law departments:

  • Variable relationships with “the business”:
    • the relationship between Legal and “the business” is frequently (tho’ not always) fraught which frustrates the ability of providers to do their best work
  • Leadership skills:
    • leadership skills are not valued in law school and in the training of lawyers resulting in a cadre of excellent lawyers at the top of law departments who – with notable exceptions – don’t know what they don’t know about leading and managing which in turn prevents law firms from doing their best for them and for their organisations
  • Deepening mis-alignment of regulatory context:
    • the regulatory context in which in-house lawyers operate is based on a “whistle-blower” model instead of robust support by the regulator of in-house lawyers under ethical pressure resulting in a disconnect between what law departments and businesses need to avoid risks and what providers can deliver evidenced by a growing body of academic research and recent corporate risk events. This disconnect is becoming more acute with the increasing pressures on GCs, for example, to advise on ESG matters at a time of pandemic. Many GCs acknowledge privately that the system is broken but feel helpless to change it. Law firms could benefit now from choosing to help resolve the dysfunction. As things develop they may have no choice or be left behind.

What if?

What if a legal services provider could be an agent of reinvention in the legal services market by helping to address these challenges?

Beyond the rhetoric, no provider is currently meeting all needs. A critical absent component is support for GCs to reframe their personal leadership purpose as CEOs of an internal break-even business.

What if this reframed leadership purpose could anchor a transformed operating model for legal services?

The problem with current provider benefits

The problem with the benefits law firms currently offer is that the benefits they provide are difficult to differentiate from the competition. They fall foul of market dysfunction which chokes off opportunities. For example:

  • Improving efficiency
    • Legal and “the business” often disagree on what efficiency means
  • Mitigating risk
    • “The business” sees anticipating and mitigating legal risk as the responsibility of Legal alone. It may reasonably view risk as a joint responsibility
  • Controlling and predicting costs
    • Legal may fail to communicate value for money because they are not trained in internal value-for-money communications. They become targets as poor cost controllers.
  • Reducing operational costs
    • Legal may fail to connect its spend to strategic outcomes and allow itself to be boxed into a corner on “doing more for less” when sometimes they need to spend more, not less, to achieve those outcomes. For example, Legal and “the business” can agree on reducing contracting costs but how does Legal sell in a case for spending more money on “conduct risk” defined as behaviour over time and which can bring a company down?
  • Improving delivery of enterprise services
    • This is the area of most improvement in recent years but even enterprise delivery can be frustrated if the role and purpose of Legal in the organisation is not clear and shared.
  • Cultivating critical insights
    • Dashboards have improved but Legal’s ability to make informed decisions based on them vary considerably depending on the alignment between business purpose and Legal’s purpose
  • Increasing business collaboration
    • Successful cross-functional collaboration depends on high EQ skills. These vary considerably amongst in-house lawyers.

I’m sure your law firm is different but…

I’m sure you believe your law firm is different to other providers in how it deals with these barriers to increasing take-up of your services but there is an opportunity for your firm to create bespoke solutions.

EY Law’s 2021 Survey states that “ …General Counsel are aware of…challenges with only 52% reporting that their department’s day-to-day work is aligned with the broader business strategy…Thirty per cent are considering creating a co-sourcing or outsourcing relationship with a third-party provider to manage parts of the legal function. This alone demonstrates that there is no one-size-fits-all route to transformation”.

If there is “no one-size-fits-all route” then it follows that if your law firm could overcome the barriers to providing a bespoke route to transformation faster and better than anyone else then you would steal a march on your competition.

A New Way. Your law firm’s way.

The full range of your law firm’s current specific capabilities can be called into service in this journey to offer a bespoke service. In addition, to crack the code of transformation fully your law firm will need to incubate critical missing capabilities:

  • to engage with individual GCs on a bespoke basis on their personal leadership purpose, strategy and behaviour in respect of running Legal as CEOs of a break-even internal business. This legal business will in turn need to develop the confidence to tell, not ask, “the business” what it needs in terms of excellent legal counsel and process to achieve its strategic objectives.

My experience

  • I have developed and tested a 7-Step In-House Target Legal Operating Model (In-House TOM) which I have piloted successfully, a leadership model tailored to GCs and a facilitation process for boards and GCs as advisers of boards to reframe their decision-making processes in light of the new ESG environment.

Ciarán Fenton

There are critical moments in meetings, like that one in 1921…

Yesterday, The Irish Times published a supplement – 1921 Truce And Treaty – on the events in 1921 that led to partition in Ireland, shaping its history for a century.

The centenary stirs deep feelings on all sides.

The centenary supplement includes a description of the meeting in London on December 6th 1921, at which 12 men – for they were all men – signed The Anglo-Irish Treaty.

That moment when all 12 had signed the document was the issue’s critical moment. The moments before or after the Treaty’s signing, momentous as some of those were, do not compare with that moment.

I am fascinated by critical moments in crucial meetings in history, politics, business and personal lives.

My fascination is not about counterfactual exploration but the behaviour of decision-makers. The quality of the process is vital.

Why, exactly, did Dev stay in Dublin? Not, what if he hadn’t.

Why, when the delegation returned to Dublin to a meeting to discuss the draft treaty, was that meeting such a shambles? Not what if it had been otherwise.

And why did Lloyd George threaten immediate war if the delegation didn’t sign the Treaty that day when he must have known that the signing could have been delayed? Not what if he hadn’t.

We all find ourselves in or as witnesses to these critical moments, even if they are not on this epic scale.

But all critical moments share degrees of joy or horror.

Hearing they’re all “being made redundant” is a critical moment of horror for a workforce caught up in a “downsizing”.

The moment the board decides to downsize is a critical moment for it. For some board members, the decision will have been easy if not joyful. For others, it’s torture.

But what of the quality of that decision? Were all the pros and cons available to all and on time? Was the decision driven through or adequately debated? Was there even a vote, or did the chair declare, “It looks like we’re all agreed then. Next item.”

Or worse, was the decision-making process fudged whereby the precise views of every director remains unclear. “A decision was made, but I was against it, actually”

Loyd George, Chamberlain (Austen), Lord Birkenhead, Churchill, Worthington-Evans, Greenwood, and Hewart signed the Anglo-Irish Treaty for the British side.

Griffith, Collins, Barton, Duggan, Gavan Duffy signed for the Irish side.

The personalities of these 12 men informed their behaviour during the negotiation and ultimately their decision to sign the Treaty. Their formative years shaped their characters.

Character defines how you behave in critical moments in a decision-making process.

Behaviour and decision-making processes at critical moments matter, one way or another.

Ciarán Fenton

Lunches are back, and so is my newsletter…

First post-lockdown lunch…

Best Meal

Embarrassingly, feedback from my regular newsletter readers over the years revealed that their favorite section was not, as I had hoped, my insightful analysis of boards, leadership and ESG issues but my Best Meal section.

One reader declared “I never read your other stuff…I just go straight to the bottom of your newsletter to your Best Meal”.

So, I moved it to the top.

It was pointless, therefore, publishing my newsletter during lockdown.

Now that restrictions on lunches have eased…

My best meal recently was at the Castle Hume Golf Club – a Nick Faldo course and location for the 2013 G8 Summit – at The Lough Erne Resort near Enniskillen.

I wasn’t there to play golf nor to look at the great G8 pictures in the bar.

No, I went there with my newspaper and with unseemly haste for my first post-lockdown lunch. There’s a balcony with an elegant corner table overlooking the final tee. Not that I was in the least interested in what was happening on the final tee.

I ordered a pint of Guinness – asked them to set up another – and a large bowl of chips with sachets of ketchup galore.

Purists may argue this does not qualify as a meal. They are wrong. Experts rightly claim: “there’s eating and drinking in Guinness”. There is.

I had a great time.

Once, this would have been an unremarkable event. Now it was a special occasion. After months of lockdown the Guinness tasted like nectar. T’was properly “pulled”. The chips were like chips should be. Fluffy inside. Crisp outside. Hot. The sachets of ketchup were faultless save that the opening nick was missing on the sides. So I tore these open with my teeth but in such a rush that I must have looked like yer man from Revenant. The service was friendly, indulgent and frictionless. What was not to like?

Books

These stand-out:

  • Wounds by BBC War Correspondent Fergal Keane is a must read if you know nothing about what happened in Ireland between 1918 and 1922 and want to understand some of the root causes of the Troubles. And if you do but haven’t read it, read it. These events took place not far from where I was born and raised but I was unaware of the fine detail. The fine detail is grim but important.
  • I’m fascinated by the USA’s presidents, especially the link between their formative years and their conduct in office. So far I have read, or listened to, books on Presidents Lincoln, Johnson, Eisenhower, Obama and, currently, FDR: No Ordinary Time by Doris Kearns Goodwin which is excellent – not least because of the detail on his early years’ influences. Robert Caro’s Passage of Power on LBJ is brilliant especially his first hundred hours in office.
  • I don’t read much fiction but enjoyed Where The Crawdads Sing by Delia Owens.

Music

Cooking

  • Many years ago a lawyer friend gave me a recipe for anchoïade which I have since deconstructed, reconstructed and, if I say to myself, have brought to an entirely new level. Like life, it’s all about balance: between the black olives, garlic, anchovies.
  • I learned how to make a Portuguese soup using chorizo and cabbage and stock which is great.
  • I ruined umpteen tea towels during lockdown. In mitigation, I tell my wife, that when cooking I feel like a conductor of an orchestra and get a bit carried away, mistaking the oven glove for a tea towel. For some reason this genuine explanation causes her to roll her eyes.

Work

  • During lockdown I managed, by Zoom, to deliver – inter alia – a programme in the USA to a GC and their team on reframing the relationship between their law department and “the business”…
  • …facilitated the board of a family business to improve decision-making by putting Propose/Debate/Vote at the heart of their governance and by reframing their relationship with their NEDs and Family…
  • …supported the CEO of a regulator and their management team in their purpose, strategy and behaviour…
  • …helped an entrepreneur launch a new consultancy …
  • …facilitated several senior leaders launch portfolio careers…
  • …pioneered an online “off-site” for a law department over six weeks using Zoom, What’s App & Slack instead of three days in a country house hotel…
  • …helped several leaders manage their First 100 Days in a new role and helped one secure a senior role…
  • ….supported a CEO through tricky COVID related decisions…
  • ….took part in a live online mock boardroom crisis in which I advised “the chair”: https://www.linkedin.com/posts/ciaranfenton_anatomy-of-a-boardroom-dispute-a-live-mock-activity-6796399299228921856–Pcg
  • developed a programme to help boards change their decision-making processes and behaviour in the light of ESG which is no fad and here to stay.

Looking forward to loads of lunches.

There are only so many left.

Ciarán Fenton

The New Board Game Blog 5: Propose/Debate/Vote – back in fashion

The New Board Game

How to adapt, behave and relate in the post-pandemic boardroom

Blog 5: Propose/Debate/Vote – back in fashion

  • Time was, on the best boards:
    • board meetings focused on motions which were proposed and seconded
    • debated
    • voted on
    • if you lost your vote, you backed the board’s decision, or you resigned
  • Now, frequently:
    • the board’s agenda is tightly controlled, usually by the CEO
    • motions are not encouraged
    • open debate is as rare a hen’s teeth
    • votes are even rarer
  • Worse:
    • if you challenge “you are not a team player”
    • votes are viewed as a sign of distrust: “if we’re on the one team, why vote?”
    • one-person-one-vote rules are ignored
    • dysfunctional relationships flourish because there’s no process to manage differences
  • But, post-pandemic
    • directors will come under a harsher conduct spotlight
    • they will want to demonstrate that they exercised their rights and performed their duty
    • proposing motions will help them demonstrate their intent
    • winning motions will become their unofficial metric
    • they will want to record their dissent if they don’t resign
    • and watch out for more resignations than in pre-pandemic times
  • Why?
    • because society’s pandemic loans/bailouts come at a cost
    • that cost is that there’s no going back to the old ways
    • you can’t take taxpayers money with one hand and dismiss it by ignoring ESG-based decision-making with the other – until now, that injustice was ignored as “that’s just business”
    • so, when your board experiences a serious risk event that causes societal detriment, your directors will want to show that they tried, much more than previously, because society will demand justice, stridently

Ciarán Fenton

The Post Office scandal – where were the “non-lawyers”? Where weren’t they?

Another day, another corporate scandal – The Post Office – which raises questions, yet again, about the role and purpose of lawyers in society and their part, or not, in these scandals.

Richard Moorhead, professor of law and professional ethics at Exeter Law School, wrote in a blog, rightly uncompromisingly, that the case raised a broad range of professional issues.

“I hope that the BSB and SRA will investigate with all due alacrity not just to see if anyone should be held to account but also for the lessons that can be learned.”

He went on: “Many of the problems here are as much corporate governance problems as legal ethics problems but we should not let that fact drop between the two stools or linger for yet more years.

“If we ask the traditional question of all such scandals, Where were the lawyers? The only response is ‘Where weren’t they? Because they were either at the heart of it or ought to have been. Not solely responsible, of course, but importantly responsible.”

Paul Gilbert, Chief Executive of LBC Wise Counsel, a consultancy which works closely with in-house lawyers has written an open letter which he hopes in-house lawyers will send to their board and Executive colleagues in the light of the scandal. The final two paragraphs are as uncompromising:

“The role of lawyers in any business, including your lawyers in this business, is to protect your interests expertly and fearlessly. However, the role of lawyers can never be just about carrying out the wishes and directions of their employers. At the heart of what all lawyers do is to explicitly and diligently uphold the administration of justice. 

No matter what the business imperatives or the pressure we all feel, we hope you know and welcome that we will not be silent if we need to raise concerns or objections to a decision, policy, behaviours or course of action that undermine our duties as lawyers. 

We are proud to be employed here, and we hope you are proud to support us in fulfilling our role.”

Legal Futures reports that “Paul Harris, senior partner of Edward Fail Bradshaw & Waterson in east London, said only a full statutory inquiry could determine “how and to what extent, if any” the Post Office’s lawyers were responsible for errors or misconduct.

Mr Harris, who also acted for three of the defendants, said: “It is not clear who knew what and when and this in itself requires proper investigation.”

So, it looks like the focus of any review or investigation will, rightly, investigate regulatory breaches by lawyers, if any.

But the reviews must not stop there. They must forensically examine the chain of command linking the lawyers and “non-lawyers” at The Post Office.

They must acknowledge what Professor Stephen Mayson, author of The Independent Review of Legal Services Regulation (2020, S 4.12) called the “inherent tension” between lawyers and their employers.

And in the case of The Post Office their employers, the “non-lawyers”, are set out on the Post Office website:

“ How we run the business

Our Board

Our Board of Directors is chaired by Tim Parker. As Non- Executive Chairman he is independent both of the executive management of Post Office Limited and of its special shareholder. The Board comprises the Chairman, five other Non-Executive Directors and two Executive Directors.

Board responsibilities

The responsibilities of the Board include setting the business’ strategic aims, putting in place the leadership to deliver them, supervising the management of the business and reporting to the shareholder. There are a number of Board committees which deal with specific topics requiring independent oversight including audit, risk and compliance, nominations of the Board, pensions and senior remuneration. Each committee is chaired by a Non-Executive Director and operates within its own agreed, documented Terms of Reference

Our Group Executive

Below main Board level, the Group Executive (GE) is the most senior leadership team which is accountable to the Board for the day-to-day operations of the Post Office. It is made up of the Chief Executive and each of his direct reports together with the Company Secretary and is responsible for delivering performance measured against the corporate objectives set by the Board and agreed with the Post Office Shareholder.”

So where were these “non-lawyers” Where weren’t they?

Where were the NEDs? Where were the corporate governance checks and balances?

Who did the lawyers report to? What performance management system was used in their annual appraisals? Who decided what meetings they were allowed to attend or not? Did they experience ethical pressure? Were they allowed to do their best work? Were they heard?

The SRA will, I suspect rightly say that the Post Office lawyers should have “blown the whistle”, if they knew, because the SRA regulations require them to “act with independence”.

But the SRA knows what everyone knows: the inconvenient truth that in-house lawyers do not have the regulatory support they need to act with independence.

Despite many requests the SRA has not undertaken a Thematic Risk Review of the risks to society regarding the independence of in-house lawyers – and in this case – an appalling miscarriage of justice to individuals.

Had the SRA acted, many years ago when this matter was highlighted for the first time, then perhaps the Post Office lawyers might have been in a much stronger position (and the opportunity for misconduct or error reduced) – reporting directly to the Post Office Chair or SID and/or able to go above their heads to the SRA routinely and not in extremis, perhaps with “Officer of the Court” written into their employment contracts, and their law department regulated as a separate unit, as per the Mayson Report.

These steps might have helped avoid this catastrophe for the wronged and for what was once “a national treasure”.

But we’ll never know, will we?

Will we?

Ciarán Fenton

The New Board Game: Blog 4 Why your NEDs should heed Bob Dylan

The New Board Game

How to adapt, behave and relate in the post-pandemic boardroom

The New Board Game: Blog 4 Why your NEDs should heed Bob Dylan

Are your NEDs out of touch?

⁃ with:

⁃ your board papers?

⁃ do they read them, all, at all?

⁃ their purpose as NEDs?

⁃ which is NO different to your EDs

⁃ or do they feel that’s not “the real world”

⁃ that, c’mon, NEDs have influence

⁃ not real power

⁃ no point in proposing motions

⁃ nor calling for votes

⁃ nor calling out poor behaviour by your Chair/CXOs

⁃ ‘cos the Chair is their boss

⁃ not the Companies Acts

⁃ not the Codes & Principles

⁃ not FRC, QCA, Wates

⁃ not these

⁃ excellent law & codes, for sure

⁃ but toothless

⁃ just tick the boxes in your Board Evaluation

⁃ and have a nice glossy section on Governance in your Annual Report

– nothing will change

⁃ because no one has an incentive to change

⁃ and the good NEDs, who know how “to NED” remain in the minority

⁃ but alert NEDs know that society is changing

⁃ by #metoo #BLM

⁃ by #ESG

⁃ by the pandemic

⁃ by furlough

⁃ by COVID loans

⁃ by case law

⁃ watch as NEDs resign as their behaviour comes under scrutiny

⁃ As Bob said:

Come gather ‘round people

Wherever you roam

And admit that the waters

Around you have grown

And accept it that soon

You’ll be drenched to the bone

If your time to you is worth savin’

And you better start swimmin’

Or you’ll sink like a stone

For the times they are a-changin’

Ciarán Fenton

The New Board Game – Blog 3: Is your board disconnected?

The New Board Game

How to adapt, behave and relate in the post-pandemic boardroom

Blog 3: Is your board disconnected?

⁃ A bullying CEO/Chair rules the roost

– a brutal CXO enforcer/attack dog/lap dog

⁃ Minutes decided before meetings

⁃ No calling out of unacceptable behaviour

⁃ No challenge on dodgy decisions

⁃ Decisions stitched up without debate

⁃ Lawyers ignored

⁃ Shaming and humiliation – the norm

⁃ Exclusive focus on the bottom line/the numbers/quarterly statement

⁃ People viewed as human resources, capital assets, “ours”

⁃ Shareholder returns, investor “exits”, LTIPs driving behaviour

⁃ Barely concealed misogyny

⁃ Open racism: D&I a chore

⁃ Families irrelevant

⁃ Stress, fatigue, burn-out: a badge of honour

⁃ Fear & anxiety constant companions

⁃ Sleepless nights before and (worse) after board meetings

⁃ Sleights, real and imagined, dominate

⁃ Personality feuds fed

⁃ Schadenfreude ever present

⁃ Emails and texts micro-examined

⁃ wtf did he mean by that ellipsis…?

⁃ And it’s all multiplied 100x on Zoom

⁃ The pandemic has hit our P&L, badly

⁃ Saved only by furlough – phew, but of course, there’s the rub.

⁃ The seeds of societal disruption visiting a boardroom near you…

Ciarán Fenton

The New Board Game Blog 2: Less profit, more impact

The New Board Game

How to adapt, behave, and relate in the post-pandemic boardroom

Your board will need to focus on making less money

  • a bit shocking that, isn’t it?
  • I mean, maximising profit has been the mantra of boards forever. How could this possibly change?
  • The system is geared towards a laser focus on the bottom line: incentives, bonuses, options
  • The markets keep score based on valuations based on profit
  • Investors want an exit at the highest return
  • Even the most pro-ESG commentators link “doing good” with the logic that it will drive higher profit
  • ESG is good for business, don’t they say?

It’s all tosh.

If there was money in ESG, everyone would be “at it” already

  • taking care of the environment, properly, costs money
  • The E in ESG will hit your P&L
  • paying/hiring/treating employees equally, fairly, and inclusively costs money
  • The S in ESG will hit your P&L
  • good governance costs money because doing the wrong thing makes people very rich
  • The G in ESG will hit your P&L
  • if your profitability improves because of these costs – it may/may not – that will be a collateral benefit/cost of ESG and not a business case

ESG doesn’t need a business case, so stop making one

  • You don’t make a business case for an elevator in your office block, do you?
  • You don’t make a business case for wifi, do you?
  • You don’t make a business case for maternity/paternity leave, do you?
  • Protecting the environment is becoming no longer optional for boards
  • Nor is protecting society any longer a buy/don’t buy decision
  • Nor is good governance an a la carte exercise.

There will be a new heading in your P&L narrative: impact of ESG costs on profit and reputation. Are you ready for those conversations in your boardroom?

Ciarán Fenton

The New Board Game: Blog 1 – What’s new?

The New Board Game

How to adapt, behave and relate in the post-pandemic boardroom

Blog 1 – What’s new?

Nothing, fundamentally, you could argue.

– the scorekeeping is the same

– the FTSE, NYSE, DAX etc. haven’t changed their calculus a jot

– accounting rules remain, largely, unchanged

– EBITDA means the same now as it did before the pandemic

– Ditto ROI

– company law is broadly the same

– so, boardroom behaviour in regard to these factors hasn’t had to change.

– Why would it?

– what’s measured continues to be delivered

But the context has changed, irrevocably

– the ESG wagons were rolling long before the pandemic, now they’re picking up speed because of it

– impact investing, green-washed or not, has notched trillions

– companies that take state aid and ignore the environment, society and governance issues are attracting the spotlight

– state bailouts have scotched the notion that business is somehow apart from the state and society

– gladiators of capitalism – The Financial Times, Larry Fink, The Business Roundtable etc. are all talking about relaunching capitalism

– young people are, to use an Americanism, seriously pissed with corporate behaviour

– above all, customers, employees and supply chains are demanding change.

If you are a member of a board – main or management – or aspiring to be one, then you have a choice: either you wait for the game and it’s rules to change officially or you decide that the game has already changed and the rules will catch up in due course and you start to adapt your behaviour to the new game now, or not.

Ciarán Fenton

–

–

Counterfactual: the FRC Code and @IRLSR S4.12 together prevent the collapse of Carillion

Carillion is in the news again. Not that it ever was, or ever will be, fully out of the news because it will never be forgotten.

It’s in the news because:

The UK’s financial regulator has said it is planning to take action against former directors of Carillion, almost three years after the government contractor collapsed under £7bn of liabilities, leaving taxpayers to pick up the pieces.

On Friday, the Financial Conduct Authority announced that it had issued warning notices to the company itself and to “certain previous executive directors” over a series of breaches of financial rules before the business failed. 

These include giving “false or misleading signals as to the value of its shares”, “failing to take reasonable care to ensure that its announcements were not misleading, false or deceptive”, and “failing to take reasonable steps to establish and maintain adequate procedures, systems and controls”.

Financial Times 13 November 2020

It will never be forgotten in the history of corporate collapses because its demise was wholly a function of conduct – behaviour over time:

Carillion’s rise and spectacular fall was a story of recklessness, hubris and greed. Its business model was a relentless dash for cash, driven by acquisitions, rising debt, expansion into new markets and exploitation of suppliers. It presented accounts that misrepresented the reality of the business, and increased its dividend every year, come what may. Long term obligations, such as adequately funding its pension schemes, were treated with contempt. Even as the company very publicly began to unravel, the board was concerned with increasing and protecting generous executive bonuses. Carillion was unsustainable. The mystery is not that it collapsed, but that it lasted so long.

House of Commons Joint Committee Report 9 May 2018

In July 2018 the FRC published its updated Corporate Governance Code, the first three Principles are set out as follows:

Principles
Financial Reporting Council
A. A successful company is led by an effective and entrepreneurial board, whose role is to promote the long-term sustainable success of the company, generating value for shareholders and contributing to wider society.
B. The board should establish the company’s purpose, values and strategy, and satisfy itself that these and its culture are aligned. All directors must act with integrity, lead by example and
promote the desired culture.
C. The board should ensure that the necessary resources are in place for the company to meet its objectives and measure performance against them. The board should also establish a framework of prudent and effective controls, which enable risk to be assessed and managed.

FRC Corporate Governance Code July 2018 (the Code)

In June 2020 The Centre for Ethics & Law, University College London published its Final Report of the Independent Review of Legal Services Regulation written by Professor Stephen Mayson in which he recommended:

Recommendation 20 (page 151): An in-house legal department should be capable, for regulatory purposes, of being registered as a distinct business unit, so that the department’s delivery of legal services would be subject to the same regulatory obligations as any other registered provider. Individuals within such a registered in-house unit should also be registered personally if they carry on activities for which before-the-event authorisation or personal accreditation would otherwise be required.

Final Report of the Independent Review of Legal Services Regulation June 2020

Professor Mayson set out his reasons for this Recommendation as follows:

There is little doubt that a tension is inherent in this relationship when the client for legal services is also the adviser’s employer. The usual expectation of ‘independent’ legal advice is often stretched … arguable that those with professional obligations might benefit from further regulatory support… In principle, they should not be at risk of dismissal or disadvantage simply for observing their professional obligations … This might entail express conditions in their employment contract, and a direct reporting line to the Board … As we have seen in recent years, corporate failures can lead to consumer and societal detriment. In-house lawyers have to be able to sound alarm bells without the chilling effect of potential reprisal.

Section 4.12

Furthermore, and of particular relevance to the Carillion case, he goes on to point out that:

…I agree with a submission in response to the interim report that we should not presume that “corporate governance alone is sufficient to address the public interest – there will be times when general counsel need recourse beyond their board, to their regulator (e.g. when the concerns derive from, or are perpetuated by, behaviour at board level)”.

Section 4.12

What if the the Code and Recommendation 20 of the IRLSR had been in force and enforced, with criminal prosecution consequences for breach, over many years prior to the collapse of Carillion? Here’s my guess:

  • Fear of prosecution relating to breaches of the Code would have prevented the creation of a decision-making culture that led to the more reckless conduct of the Board
  • Carillion’s in-house lawyers (in respect of whom the HOC Report is silent) would have been in a position when the early signs of reckless conduct presented themselves to reach “beyond their board and, to their regulator (e.g. when the concerns derive from, or are perpetuated by, behaviour at board level)” and which recourse would have acted as a brake on that behaviour. I don’t accept the point, often made, that this would mean that all companies would stop employing in-house lawyers. If some did , would that not be a statement about them?
  • The lives and pensions of thousands would have been protected, the taxpayer saved millions, and trust in boards, lawyers, regulators and politicians to protect wider society would not have been tarnished so irreparably.

But that’s the counterfactual.

The current reality is that the Code is an excellent framework, but without criminal sanction to back it up, it won’t prevent another Carillion. Nor, even worse, will the current regulatory framework under which in-house lawyers function.

Sadly, there appears to be little appetite in parliament, boards, the legal profession and the SRA to grasp this nettle.

I have written extensively on this subject in the current edition of the Modern Lawyer quarterly journal, edited by Catherine McGregor and published by Globe Law & Business, in a long read entitled: Inherent tension in-house: defusing the law department time bomb at a time of pandemic. I have spare copies. Email me at cfenton@ciaranfenton.com with your postal address if you would like a copy.

Meanwhile, there is light at the end of this bleak tunnel: the pandemic and the ESG movement will create an environment in which parliament, boards, the legal profession and regulators will be forced by society, including employees, customers and suppliers through social media, to prevent another Carillion because the price of the furlough schemes and COVID-19 Financing will be much better conduct.

Much better, or else.

Ciarán Fenton