Balancing act for the general counsel

For company general counsel, the pathway between responsible legal advice and effective commercial business partnership can prove to be something of a tightrope experience.

The role of the general counsel has changed radically in recent years. A company’s senior lawyer is expected to not only advise on legal issues that may affect the company, but also to be a “partner” to the business to achieve commercial outcomes.

At the same time, an increasing focus on environment, social and governance (ESG) issues has meant the GC is often also expected to advise on ethical and reputational issues, even where the legality of a course of action is not in doubt.

Australian Securities and Investments Commission (ASIC) chair Joe Longo has said that successful general counsels are at the table, having an impact on what the company does and doesn’t do and acting as the gatekeeper and conscience of the organisation.

“A good general counsel will display judgement and help boards and companies make good decisions about what transactions to enter into, who to do business with, manage reputational risk and, in particular, to help companies stay focused on what’s in the best interest of the organisation and its customers and shareholders,” he said in a 2022 speech.

Bruce Cowley FAICD, a non-executive director of the Australian Retirement Trust and chair of the Queensland Trust for Nature, agrees that the general counsel should be the gatekeeper and conscience of the company.

Because this role may get lost where the GC reports to the CFO or head of risk, Cowley believes the general counsel should hold a very senior position, preferably reporting to the CEO and with a dotted-line responsibility to the board.

“The board needs to be satisfied that the general counsel can give full, frank and fearless advice to the board unfiltered through that managed lens,” says Cowley, a former chair of law firm MinterEllison and a former GC.

The GC should also be present at board meetings, not necessarily for the entire meeting but for significant parts where legal advice or a legal view might be helpful to the board.

Balancing the GC’s responsibility to the court as a lawyer with their role in the company can be made difficult when management puts pressure on them.

“That’s not necessarily a bad thing that management and our clients want to get deals done and to test the advice of the general counsel. The GC needs to remain strong and maintain their ethics and do the right thing,” says Cowley.

Like other directors who spoke to Company Director, he says GCs should absolutely not be prepared to bend the rules to enable the company to do something, just as a lawyer in private practice wouldn’t be expected to do so.

However, the risks for GCs are much greater in one regard, because they are also employees of the company.

Just as GCs have a responsibility to bring risky matters to the attention of the board, the board has a responsibility to ensure the GC is given opportunities to do so.

And to fulfil their directors’ duty of acting in the best interests of the company they must consider that advice.

“Depending on the nature of the matter or the size of a transaction, I personally like to eyeball the lawyers, just to hear from them confirming that this is their advice,” says Cowley.

“It’s helpful for the board to probe and ask questions as they would any executive who would come to present — to probe and not just accept the advice, but to understand it fully so that when they do have questions then they get answers that they understand.”

Ethical considerations

Freya Smith MAICD, GC and company secretary at banking technology company Cuscal and a non-executive director at ASX-listed software company IXUP, says a general counsel plays dual roles — the defensive role as gatekeeper and what she calls the “offensive” role, which is to be a business partner to the organisation.

“The offensive role can sometimes come into conflict with that gatekeeper role,” says Smith. “So it’s really at all times trying to balance the demands of those different hats that you need to wear.”

Even though the role has changed somewhat, the GC remains unique among executives in that their responsibility is first and foremost as an officer of the court and second to the company itself, not to the individuals within the company.

GCs need to treat that responsibility with respect, because sometimes they can be the only voice at the table saying things people don’t want to hear, according to Smith.

“Where I find it sometimes comes into conflict is you need to be thinking about what hat am I wearing in each particular situation,” she says. “I love being a business executive first and sometimes a lawyer second, but sometimes you have to be the lawyer first and that’s why it’s really important to always keep in mind where your ultimate responsibility lies.”

However, the expanding role and increased commercial focus on the GC can create a tension between being a gatekeeper and an executive who helps the company achieve its aims.

When the GC and the board get it wrong, the consequences can be severe, as shown by the ASIC proceedings against Star Entertainment Group directors and officers, alleging they breached their duties by failing to give sufficient focus to the risk of money laundering and criminal associations.

The directors and executives at the casino company — including former general counsel and company secretary Paula Martin — have denied the allegations. In the ongoing civil action, ASIC alleges that Martin, former CEO Matthias Bekier and former chief casino officer Greg Hawkins failed to appropriately escalate money laundering issues to the board.

Several general counsel agreed that GCs had a role to play as a gatekeeper and ethical adviser to a company, but saw it as more of a shared responsibility.

“I don’t agree with this sort of analysis of the GC being the angel on the shoulder of the company that’s going to otherwise charge off and… commit breaches of law or otherwise act unethically,” says Janelle Reid AAICD, GC at Coal LSL, a government corporation established to regulate and manage long service leave entitlements for coal miners.

Directors should play a role in upholding ethics, particularly as many now have environmental, social and governance obligations and an expanding personal liability for board decisions.

As directors’ names are on board minutes as making or signing off on decisions, they also have their reputations to protect, says Reid, who is also a director of Coles Little Athletics Australia.

Managing risk General counsel and directors spoken to by Company Director say they’ve never personally experienced a situation where the board was ignoring the GC’s advice if they said something was illegal or where the GC was trying to help the business circumvent a law.

Rather, GCs are more often asked about the commercial legal risk of taking a course of action, such as in contract terms.

“If an organisation is proposing to do something that is just an outright breach of law and everyone’s going to jail, then of course the general counsel has an obligation to put forward their honest advice and provide that to the board,” says Reid, adding that she has never personally been in such a situation.

“The more typical situation is where there’s an activity and it involves an element of legal risk. Some paths carry more legal risk than others.”

In such a situation, the GC might draw on the organisation’s risk management matrices and work with other executives to brainstorm ways the organisation could pursue its goals and mitigate risks along the way.

It is ultimately a question for the board and its risk appetite, and the GC’s advice is just one aspect of the board’s overall consideration of an issue.

“Lawyers are generally quite risk-averse, quite pessimistic and that isn’t always in line with the [risk] profile of the company themselves,” says Reid.

She sees the importance for the board in following the GC’s legal advice as sitting on a continuum.

In some instances, the lawyer will need to accept that something isn’t the most legally perfect outcome, but the decision is ultimately one for the board.

Then there are bigger, more serious potential contraventions where the GC needs to impress upon the company that an action is a potential breach of the law.

To be effective in such a situation, GCs need to draw on their persuasive power, particularly if they don’t have much power from their position in the company hierarchy.

They need to win trust and build their reputation as a strategic business partner who shares the goals of the company, but wants to help the company achieve them in a way that obviously avoids breaching the law and minimises legal risk.

“If you reserve your positional power and status as the legal officer for the corporation for the issues that really matter, then you’re going to more likely have the persuasive power that people will view you as somebody who can be helpful — and they’re more likely to listen to you,” says Reid.

“But also if every board meeting you just say, ‘It’s a fire, say it’s fire’, you’re going to wear out your ability to emphasise when really high-risk matters are occurring.”

Boardroom access

GCs who are also company secretaries have an advantage in being present at board meetings with access to the chair and board members.

David Fagan, a non-executive director and chair of the risk management committee at Medibank, notes GCs need to be “a forceful advocate” for the position they’re putting.

“You need a general counsel who can go toe-to-toe with the management team,” says Fagan, a former chief executive partner at commercial law firm Clayton Utz and a member of ASIC’s Corporate Governance Consultative Panel.

Along with good legal skills and a commercial sensibility, GCs need to draw on good relationship-building skills to be effective in the boardroom.

There are often strong personalities sitting around a board table, including directors used to dealing with senior lawyers and more than prepared to challenge them on their advice.

GCs need to be confident in the way they put their opinions. The GC must also provide frank and fearless advice as an external lawyer would.

“You certainly would not want the GC tailoring advice to a particular cohort either within the management team or within the board,” says Fagan.

Lauren Selby, a partner in Herbert Smith Freehills’ head office advisory team, says as a result of the general counsels’ duty being to the company itself rather than management, a GC should come to the table with objectivity and act as a trusted adviser.

This can give rise to occasions when they aren’t on the side of the board or management, as they will need to take an umbrella view and look to protect the company’s best interests.

“The GC can’t just see their job as someone who makes things happen in accordance with what management wants or that they’re passively watching on,” says Selby.

“All material information will flow up to the GC, so they really are in that position where they can look out and protect the company, and that’s a key part of their role.”

The access to information and the role as adviser to management and the board put the GC in a unique and privileged position.

If they see an action that is legally compliant, but might cause a reputational issue or a regulatory issue, it’s the GC’s job to raise the issue rather than just accepting that it ticks the legal box.

And the board would expect that the GC’s concerns are elevated, even though the GC reports to management.

Where the GC is at odds with the CEO, Selby advises that an “elegant solution” is for the GC to suggest that they brief the chair on the matter.

The board would expect the management team to be transparent in escalating material information.

“There are some cases where, for management, it’s easier to not run an issue past the board — not because they’re trying to pull the wool over the board’s eyes or anything like that, but because it’s quicker and easier to get things done,” she says.

“That’s really where the GC might need to step in and say no, this does need to be escalated.”

In this context, the top priority for directors is to learn about the regulator’s expectations, according to Gallaghers Australia national head of professional and financial risks Michael Herron.

He notes that Longo’s address at the AICD’s Australian Governance Summit was instructive for boards on the regulator’s view on their duties, adding, “The executive team set the direction and tone for the expectations of the senior officers such as the GC.”

Longo has emphasised that the GC role is crucial and the board is entitled to get responses from management that can be relied upon.

“Once the board has asked the questions and challenged management based on what is reasonably knowledgeable to the board at material times, then it can be immediately seen how significant the board’s reliance on management is,” says Herron.

This article first appeared under the headline ‘Keeping your Balance’ in the July 2023 issue of Company Director magazine.