A GC's role is to uphold ethical standards, but how far should they go when they suspect wrongdoing? Caroline Hill reports

The general counsel role can be notoriously lonely at times, but no more so than if the GC is unhappy with the integrity of the business practices and ethics within their company.

GCs are increasingly expected to be a part of their company's senior management team – a board-level appointment is now regarded as something of a kitemark that says you've arrived and are taken seriously by the business.

And with in-house legal teams increasingly successful in attaining management buy-in, the company is more likely to turn to its own lawyers on day-to-day matters rather than incur the expense – and potential supervision – of external lawyers.

In these days of austerity, this is all well and good, and a strong GC should be able to ensure that effective compliance measures are in place.

In his GC's Eye View blog, Tom Kilroy, GC and until recently acting CEO of London-headquartered software company Misys, says: "As a GC, it's your role to ensure your company has clearly defined statements of policy on compliance with law and ethics; clear communications from the top; training for employees on the content of the company's policies; ways for staff to raise concerns without fear of retaliation; due diligence on third parties you do business with; ways of monitoring and auditing compliance; and appropriately independent response to policy violations."

At larger listed companies, the level of scrutiny from investors, analysts and the public means these processes are usually already enshrined in company policy and procedure.

The board is likely to tread very carefully when it comes to complying with corporate governance.

But, at smaller or private companies operating away from the microscope, board decisions are regularly being taken where the only people who know about that decision are the board – and the GC.

For one ex-GC who moved from a large household name to a smaller private company, this issue is very recent and very real.

Unhappy that the business practices in the new company were highly unethical, the GC was assured by management that it was normal practice for a company of this type.

The unhappy GC took legal advice and, feeling that the legal position was far from clear, left the company.

Tone from the top

Whether the dilemma for a GC be breaches of corporate governance or something more serious, the voice of the CEO and the board at large is one of the most significant factors in how this is viewed and dealt with internally.

While serious illegality may occur more rarely, concern among in-house counsel over repeated breaches of corporate governance is "prevalent", according to Nick Woolf, partner at headhunters Sainty Hird.

"A lot of decisions are taken by the CEO. They don't necessarily look at their own constitution when making acquisitions. Is it criminal? I don't know, but I do come across people who find it uncomfortable."

The CEO is instrumental in setting the tone, or culture within an entity. As Kilroy says in his blog: "'Culture' has been described as 'the way people do things when nobody else is watching' and is the principal factor in whether an organisation will successfully strive to adhere to legal and moral standards.

"The 'tone from the top' must involve all business leaders, not the GC alone."

The principles

The problem for a GC faced with what they believe to be unethical behaviour is where their duties, obligations and liability lies.

The unhappy ex-GC says: "There is no duty to inform. You have a duty of confidentiality to your client, but you have a duty not to bring the profession into disrepute. You just have to follow your own moral compass."

The starting point is that in-house lawyers must comply with the Solicitors Regulation Authority (SRA) Code of Conduct, in particular the duty of confidentiality in Outcome 4.1 and the principle to behave in a way that maintains the public trust.

The SRA's head of ethics guidance Maria Round (pictured) says: "To evidence his compliance with this principle, it would be advisable for the solicitor to speak to his client with regard to the legality of their activities.

"He/she should make it clear that he will not be able to continue to act for them if to do so, would put him breach of the law or the SRA Code of Conduct.

"The solicitor could not act in any matter that would involve him in any illegal activity.

"To do so would put him in breach of Principle 1 – to uphold the rule of law and the proper administration of justice – and would leave him open to criminal and disciplinary penalty."

Black and white

If all ethical dilemmas were as black and white as the SRA's Code of Conduct, addressing them would be easy.

However, in light of the commercial nature of the GC's role, they are increasingly exposed to robust (not necessarily illegal) business practices and decisions that are deemed necessary for the company to survive and prosper.

The GC of one large retailer says: "If the board are taking tough decisions – which, in the current climate, is quite likely – it is entirely possible that you are not going to feel comfortable with it."

The position is further complicated by the fact that the GC's role is not only to keep a company on the straight and narrow, but also to help facilitate growth within acceptable risk parameters.

It can be a narrow path to tread, particularly where the GC sits on the board and is party to the full decision-making process.

Woolf says: "There is a trend towards GCs being appointed to the board, but my view is that they should not be.

"GCs should attend board meetings and know what's going on, but it's far easier to stand up for corporate governance if they are not on the board."

Where a GC feels uncomfortable with the decisions being made, they first need to work out if the issue lies with the company or themselves.

According to one magic circle head of corporate, sometimes unhappiness with business practices can simply be an indication that you are ill-suited to the business.

"Hopefully you will have done your due diligence so you know if things are going to be slightly racier than you're comfortable with," the head comments.

"There is a distinction between putting up with a culture that endorses illegality and a culture that is robust. In the former, if you put up with it, you may be complicit and if it's real wrongdoing, you could be involved.

"If style is the thing you don't like, you can either put up and shut up or leave."

Options

Having made the decision that the issue is with the company, it is clear that an in-house lawyer ought to escalate the matter as set out by the SRA.

Sarah Clover, joint head of Clyde & Co's professional and financial disputes team, adds: "Where there is illegality, the lawyers ought to be reading the riot act to senior management saying 'You've got to sort this out and involve the police'.

"They should be the policemen. Part of the job is to make sure things stay on the level."

The head of corporate adds: "If I was an in-house lawyer and I saw real criminality, it would be the right thing to do to sort it out in-house and talk to the directors, the board or the chief executive, depending on where the problem lies."

However, faced with these kind of ethical dilemmas, many people choose to leave rather than to pick a fight with management.

Woolf says: "These are people who have got mortgages and all the real things that happen to real people. They look for a new job and get out that way."

After all, developing a reputation as a troublemaker or whistleblower may be unhelpful to your future chances of employment.

While this reaction is understandable on a human level, it is unhelpful in bringing the issues into the open and furthering the debate.

Many external lawyers are simply unaware of the difficulties faced by senior in-house lawyers.

Clover, one of the market's leading professional liability lawyers, says: "I can't think of one occasion I have had to advise an in-house lawyer on their obligations and regulatory obligations because they rarely get sued."

Nonetheless, the issue is highly topical after the House of Commons' Culture Media and Sport committee last year criticised News International's former legal manager Tom Crone for potentially turning a blind eye to evidence in the phone hacking scandal.

The News International case is a stark reminder that just because the practices of a company have not been discovered, it does not mean they never will be.

The SRA's free Ethics Guidance helpline is open Monday-Friday on 0870 606 2577.