Corporate Governance Lessons from New Chief Legal Officer Surveys

Michael W. Peregrine is partner at McDermott Will & Emery LLP, and Charles W. Elson is Founding Director of the Weinberg Center for Corporate Governance and Woolard Chair in Corporate Governance (ret.) at the University of Delaware.

Two prominent new surveys on the role and function of the Chief Legal Officer (“CLO”) contribute to “best practices” expectations that the corporate legal function assumes a significant hierarchical position within the organization. This is a particularly important development, given the upcoming 20th anniversary of the Sarbanes-Oxley Act and renewed interest in the degree of board oversight of legal affairs.

One of these documents is the “Chief Legal Officer Survey” published annually by the Association of Corporate Counsel (“ACC”). The other document is the survey, “General Counsel in the Boardroom”, from a partnership of Diligent Corporation and Corporate Counsel.

Collectively, the two surveys provide boards of directors with a strong sense of standards and guidelines they should consider when monitoring the effectiveness of their company’s legal function. They also identify significant areas for improvement in terms of CLO authority, responsibility and access to leadership. For these and other reasons this survey should be closely considered by the board of directors and any committee with delegated responsibility over the corporate legal affairs function.

It is critical that the board exercise informed oversight in connection with this responsibility, and not simply rely on the CEO’s judgment with respect to the structure, operation and stature of the corporate legal affairs department.

Survey findings that support a strong and empowered CLO position include the following:

  • Over 80% of surveyed CLOs have a reporting relationship to the CEO; while over 50% have a reporting relationship with the board; regularly attend board meetings, consult with senior executives on operational matters, and are sought out by fellow executives for advice on business matters.
  • An increasing number of CLOs are assigned additional responsibilities for leadership of other critical legal functions (e.g., compliance, ethics, privacy and business risk).
  • 60% of surveyed legal departments include at least one legal operations professional, while 70% of surveyed CLOs identify legal operations as a leading departmental strategic initiative.
  • There is a significant increase over the last year in the percentage of surveyed legal departments that expect to add legal and paralegal staff; this is seen as part of the CLO’s effort to improve internal client satisfaction with the delivery of legal services.

Survey findings that should receive close consideration by the board include the following:

  • Of those CLOs who do not report directly to the CEO, a disconcertingly high percentage (47%) report to the CFO, contrary to established governance principles.
  • A surprisingly high percentage of CLOs (40%) still do not possess a reporting relationship with the board of directors; precluding the board from having ready access to its legal counsel.
  • Less than 25% of surveyed CLOs have responsibility for ESG matters, despite increasing evidence that speaks to the qualifications of the CLO for that role.
  • Of those CLOs who regularly attend board meetings, the percentage of those who have additional, significant contact with board and executive leadership (e.g. meet with/are sought out for advice by business leaders on risk and operations; who participate in executive sessions or otherwise have access to board members) is static if not declining when compared to 2021 survey results.
  • Surprisingly, one of the surveys reported that 37 percent of the senior corporate counsel surveyed hold seats on the board (see commentary below).

Key Board Take-Aways

While the survey results will speak in different ways to different organizations, the following highlights are likely of universal governance relevance, across the commercial sector:

  1. Companies whose CLO does not (a) occupy a position of hierarchical prominence in executive leadership; (b) report to the CEO; and (c) participate in business decisions; are likely to be considered “outliers”.
  2. CLO-to-CFO reporting relationships do not represent “best practice” and may undermine governance and compliance efforts.
  3. Formal CLO-to-Board of Director reporting relationships, and meaningful “face time” opportunities, are an essential part of effective governance.
  4. CLOs are increasingly being assigned leadership responsibilities for operational functions with strong legal implications.
  5. Old concerns with CCOs reporting to the CLO are increasingly outweighed by practical risk-oversight necessities and the use of futility bypass reporting options.
  6. CLOs are increasingly being assigned the additional duty of Corporate Secretary, in part because of the clear legal duties associated with that position.
  7. CLOs are increasingly being tapped for service as voting members of the corporate board (although not without some concerns).
  8. The board of directors (or key committee thereof) should retain the right to approve, or ratify executive decisions concerning, CLO retention, termination, and compensation.
  9. The CLO is well-situated to play a leadership role in DEI and ESG development, as well as in board recruiting and new director onboarding.
  10. The workload of the CLO and the department of legal affairs is only expected to increase, and will require a budget to support demands on its time and focus.

Summary

The board of directors has a fiduciary responsibility to assure the effectiveness of the corporate legal affairs function, and the prominent hierarchical executive status and authority of the CLO position. The new surveys provide information that can help inform the board in the performance of these responsibilities and thus should be brought to its attention.

It should be assumed that the survey questions do not (and could not practically) address the full scope of factors the board should consider when monitoring the effectiveness of the corporate legal function. While they provide a valuable perspective, the board should consider contacting outside advisors for support in identifying monitoring guidelines.

More importantly, we believe that a company’s General Counsel should never serve as a member of the company’s board, except in unusual circumstances. The Counsel is there to provide professional legal advice to the Board as its lawyer, not to act as a monitor of the management of which he or she is a member. However, it is vitally important that the General Counsel attend each board meeting to ensure that the board is properly counseled legally as they carry out their critical fiduciary responsibilities. While the Counsel is clearly a member of company management and reports to the CEO, the Counsel’s fiduciary obligations run to the Company itself and the investors and thus must be viewed as responsible ultimately to the Board of Directors and not company management.

The Chief Legal Officer Survey is available here. The General Counsel in the Boardroom survey is available here, with accompanying report here.

Trackbacks are closed, but you can post a comment.

Post a Comment

Your email is never published nor shared. Required fields are marked *

*
*

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <s> <strike> <strong>