Boards will ignore Section 5.8 of the LSR Interim Report at their peril

IRLSR

Professor Stephen Mayson published his Legal Services Regulation Interim Report today. He deals with in-house lawyers in Section 5.8 on page 70. The section is notable for its implicit commentary on the current context in which in-house counsel operate as it is for its specific proposals and questions regarding changes in regulations.

In the second paragraph he states:

“Analysis of the legal services market shows that a significant and increasing volume of lawyers (about 20%) and legal services are now in in-house settings. There is little doubt that a tension is inherent in this relationship when the client for legal services is also the adviser’s employer, and the usual notion of ‘independent’ legal advice is often stretched.”

This paragraph raises several questions in the mind of, say, a curious Martian were they to land on Earth today and read the report:

  • If there is “little doubt that a tension is inherent in this relationship” why has this tension not been addressed before now?
  • If the “usual notion of ‘independent’ legal advice is often stretched, why has this “stretching ” not been investigated more frequently heretofore?
  • Since the “little doubt” of which he writes is supported by ample anecdotal and written evidence of which most interested parties are aware, not least the UCL Moral Compass Survey 2016 which detailed the extent to which in-house counsel experience ethical pressure, why have boards of directors not done anything about it? 

He goes on to say:

“Equally, those advisers who are professionally qualified would typically prefer to maintain their professional independence, ethics and standards and not bow to any organisational or commercial pressures to modify their advice to make it more palatable to their internal clients. In these circumstances, it is arguable that those with professional obligations might benefit from further regulatory support (see also the discussion of ‘inverse vulnerability’ in paragraph Version: IR Final2 71 4.5.3). This could strengthen their position when dealing with internal clients, and provide an independent benchmark or standard against which to justify their professional advice. In principle, they should not be at risk of dismissal or disadvantage simply for observing their professional obligations.”

The Martian might, therefore, reasonably ask:

  • Are in-house lawyers currently at risk of dismissal or disadvantage simply for observing their professional obligations, yes or no? 
  • If no, what’s the problem?
  • If yes, why have they not by now received “further regulatory support”?

Professor Mayson moves on to governance:

“Further, effective corporate governance should ensure that in-house lawyers are able to function effectively and are supported in doing so. This might entail express conditions in their employment contract, and a direct reporting line to the Board (or to the chairman or a senior independent non-executive director).” 

He references in the footnotes a paper for discussion about best practice: “In-house lawyers and non-executive directors” by Professor Richard Moorhead and others. 

The Martian, equipped as they are with instant access to all data on the subject, might ask:

  • Why do their current contracts not include “conditions”, given the acknowledged “vulnerability”?
  • Since currently, in-house lawyer’s client is already “the board” why has no-one challenged the widespread practice of GCs reporting to CEOs and even CFOs who have unlimited power over their salaries, titles, and performance reviews?
  • And in respect of the latter and in reference to “independence” above why are they allowed to take advantage of LTIPs and Bonus schemes?

It is the final paragraph in 5.8.1 that is most shocking and might take our learned Martian by surprise:

“These are not simply private or commercial matters. As we have seen recently, corporate failures can lead to consumer and societal detriment, and in-house lawyers have to be able to sound alarm bells without the chilling effect of potential reprisal. The public interest in effective and fearless legal representation is engaged in much the same way as it is with private practice.”

The Martian might be forgiven for asking in respect of recent corporate failures:

  • Did some in-house lawyers not “sound alarm bells” because of “the chilling effect of potential reprisals”? And in what instances? Do we know?
  • Did some in-house lawyers sound the alarm bells and in fact experienced the chilling effect of reprisals? And in what cases? Do we know?
  • Since “the public interest in effective and fearless legal representation is engaged in much the same way as it is with private practice” why in respect of recent corporate failures was the public interest not protected?

The report goes on to examine the merits of separate registration and other remedies. 

However, I would encourage boards, GCs, regulators, Larry Fink and the 181 signatories of The Business Roundtable and anyone else interested in ESG to pause at the end of Section 5.8.1 and ask the question that the Martian might, again reasonably, ask:

  • While we may need to wait for a final report to propose new regulations, it’s clear that the public interest remains manifestly unprotected today; surely that can’t wait? What are boards, GCs and the profession/regulator going to do about it?

Whatever changes in regulation are agreed in future, boards would be wise to confront this issue now, before the tumbrils roll. 

There is simmering anger in some quarters in the profession because none of the above is news to them. If they came come together, tomorrow, and had each other’s backs in a manner which defies their litigation training, and demanded immediate behaviour change by Boards, under the current regulations, a good start would be made on this problem.

Boards who are relying on lawyers’ propensity to be adversarial with each other are unwise. Their anger is likely to break cover. This report may see to that. Few CEOs and boards are even aware of the problem. That’s about to change.

Ciarán Fenton

Many CEOs routinely “spiritually prorogue” their boards, and get away with it

Prorogue

Last week Prime Minister Johnson cynically prorogued Parliament. Cynical proroguing is posh parlance for thuggery. Few commentators doubt that he used his power to silence others with the potential to limit his actions.

We’re not surprised that he did so because we have come to expect cynical behaviour. Society tolerates it.

In boardrooms, where most people’s work is regulated and controlled, we have come to expect the routine silencing by CEOs of others.

In business, CEOs don’t prorogue board meetings, literally. They don’t “suspend” them. But, at times of their choosing, they may as well have done. They, effectively, silence others.

You may argue that directors on boards who remain silent have only themselves to blame. They should and can speak up. And you’d be right.

The unwritten rules of board behaviour make this problematic. It’s a spiritual silencing, not a literal one.

You and I, I’m sure, have witnessed CEOs silence others in meetings. They succeed because the silenced fear losing face, promotion, their jobs or all three.

In over 35 years of my working life, some of my standout memories are of witnessing and, sometimes experiencing, brutal acts of silencing on boards and on senior teams.

CEOs can also silence others by less brutal but frustratingly effective means: manipulating the board agenda in terms of order or content or both; doing a “Sir Humphrey” on the minutes; delaying or not sending out papers in advance, not voting on motions, and crucially, by having a weak Chair.

Since most power resides on Operating Boards, not on most Main Boards, then the CEO is the most influential person in the room because they chair operating board meetings.

So far, so what? It’s been ever thus I hear you say.

But things are changing. Cracks are appearing in the heretofore unassailable stone walls that powerfull CEOs can erect in front of those who want to challenge them. They can “prorogue” open debate as much as they like, but society is fighting back.

It’s early days, but the movement towards fairly balancing environment, society and governance with profit is gaining ground.

While the amoral behaviour of, for example, Prime Minister Johnson and President Trump is tolerated by their “base” and by those who hold their noses while applauding the outcomes of their actions, they nevertheless are creating a pressure cooker effect on those who shake their heads in disbelief and frustration.

Robert Shrimsely writes in the Financial Times (31/08/19): “Sometimes breaking a code can have greater consequences than breaking a rule. Future governments will consider the unwritten codes to have changed…the principle of “whatever it takes” is gaining supremacy…[But] there are reasons conventions survive. All sides know that the boot will one day be on the other foot…what goes around comes around”.

He’s right. Sooner or later, the bad guy gets his comeuppance.

If next week you are heading back into a work situation in which “spiritual proroguing” is systemic in your organisation or profession to the extent that you don’t expect any change any time soon, then think again.

If you have given up, don’t. I know it’s not easy, but there is hope. You can do something about it. I have witnessed and have had the privilege of facilitating previously unthinkable turnarounds in behaviour.

Society gives businesses a mandate to make a profit but not at any cost. And certainly not at the expense of your dignity, mental health and your right to a fulfilling day at work.

You are not on your own. Find others who feel as you do. Join forces with them. Share stories: feelings, needs and possible actions. Work together to find a better way. But above all: protest.

Without visible protest, we silence ourselves.

Ciarán Fenton