Inside Experts: The role of in-house lawyers in protecting corporations

In-house lawyers should remain loyal to their companies.

The Occupy Wall Street movement’s Human Worth Amendment states, “A corporate entity is not a person and, therefore, is not entitled to the rights and protections set forth in the Constitution of the United States of America for human-beings.”

The immediate impetus behind the statement is the Supreme Court’s 2010 decision in Citizens United v. Federal Election Commission allowing corporations to fund political speech. But there may be more than just campaign law under challenge. Putting aside politics, and looking at the Occupy movement’s general sentiment against corporations on a professional level, it seems to me that the protesters are posting the very fundamental question of whether corporations should be allowed to continue as self-directing business organizations, managing their own money and affairs, sanctioned and protected by laws.

What part do in-house lawyers play in this conflict, either as part of the problem that is being railed against, or as part of a solution?

By definition, an in-house lawyer is a lawyer who works for a corporation, either closely held, publicly traded, parent or subsidiary. As UCLA law professor Stephen Bainbridge says in his blog, “Remarks on In House Counsel as Gatekeepers,” “When a corporation hires a lawyer, the lawyer represents the corporation and its shareholders, not the managers.” The American concept of the corporation—shareholders elect directors who oversee officers—is a governance model for charting and working towards business goals, and for imposing checks and balances against risky or morally hazardous behavior, though not always successfully, e.g., Enron. More than anyone else, in-house lawyers are positioned to distinguish between the management and the corporate entity itself, and to help ensure that corporate governance is carried out effectively. As Bainbridge points out, when in-house lawyers forget their true reporting line to directors and shareholders, and become complicit with management, companies get into trouble.

In-house lawyers ensure that companies maintain their legal status as a corporation, often by serving as company secretary. As far back as the 19th century, statutes authorizing the formation of corporations have limited shareholders’ liability to their stock investment (officers and directors are still liable for torts and crimes). If asked to name their single most important responsibility, most  in-house lawyers would answer, “Protect the company.” Maintaining corporate status is the first and best tool  in-house lawyers have for mitigating liability. It stretches from keeping board meeting minutes, to incorporating and using affiliates to conduct business, to obtaining authorized signatures for documents. These tasks can be mundane and heavy on paperwork, yet they underlie all other in-house legal responsibilities.

While corporations are a creature of statute, they are also made up of people who make decisions on behalf of the corporation. Over the course of my  in-house career, I have learned to look for agreement among my business side colleagues before acting or responding. For Type A personalities like me, this can be a hard rule to follow. But there came a point when I realized, literally, that the word “corporate” means a group of people working together, and that I didn’t need to feel like I had to go it alone to do my job. I also learned to develop formal company policies for how to perform my job, document them, and then follow them down to the letter. If exceptions are to be made, I allow the escalation process to play out and the business side to make a strong enough case for making the exception. Policies ensure the company’s interests are served in day to day operations, regardless of who in the company is involved or the circumstances.

I also promote my company’s products when opportunities present themselves. Corporations only exist to produce goods and services of some kind. There is no such thing as a corporation dedicated to evil like Virtucon from the Austin Powers movies, though the Occupy protesters would seem to think so. A number of years ago, I spoke at an all-day law conference in Boston on the topic of application service providers (ASPs). A panel of lawyers from a well-known enterprise resource planning software company also gave a presentation.  To me, they sounded more like sales people than lawyers. I came away from the conference thinking their presentation was inappropriate. But the more I thought about it, the more impressed I became by the energy they put into promoting their company’s product. Ever since then, I have tried, in my own style, to pitch my company. If you don’t feel comfortable promoting your company’s products, you should not say anything bad about them.

To sum up, here are four principles all in-house lawyer should follow in their jobs:

  1. Recognize that responsibility ultimately is owed to the shareholders.
  2. Maintain corporate governance mechanisms and the company’s corporate status.
  3. Make decisions as a member of a group according to company policies.
  4. Promote the company’s products, or at least never say anything bad.

The above is not an apology for corporations. Corporations do bad things. How the company invests or doesn’t invest its money, how the executives use the corporate jet, the lengths the company goes to avoid paying taxes, whether the company looks the other way while suppliers use child labor—I don’t think there is any clear, right way for  in-house lawyers to deal with what they may consider unconscionable corporate behavior. I don’t think leaking or publicizing through social media is ever justified. I don’t think whistleblowing is always the right thing to do, to the extent it is permissible for an  in-house lawyer to blow the whistle. I would do my best to first raise objectionable or illegal activities to executive management. Recognizing that doing so has a potential downside, such as unemployment, I would consider contacting management either anonymously or presenting concerns in a business-like way that pointed out the harm to the company if nothing is done.

I believe if I am employed by a company, I owe my loyalty to that company. Loyalty is something more than the attorney-client privilege or a duty of confidentiality. It is respect for the fact that somewhere along the line there was a lot of hard work and risk-taking and talent that went into building the company, and that a lot of people have invested not just money but their hopes for the future in the company. I’m not interested in tearing that down.

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