In conversation after conversation about the current corporate governance climate, one company name comes up without fail: BP. On the surface, this is no surprise. The beleaguered petro-giant is in the thick of a corporate crisis of epic proportions, struggling to contain a massive oil leak and waging a high stakes PR battle at the same time; contending with criminal investigations even as it collaborates with the government on disaster response and remediation efforts. It’s every company’s worst nightmare, and a common refrain on the lips of governance experts is laced with humility and fear: “There but for the grace of God go I.”

What is surprising, however, is that when you think about it, the oil spill is outside the traditional domain of corporate governance. This isn’t a problem with accounting, auditing, reporting or other conventional facets of governance. There’s always the chance the recently opened criminal investigation into the BP disaster (see “DOJ launches investigation into the gulf oil disaster“) will turn up some smoking gun memo that demonstrates a governance failure led to the calamity, but we don’t know that now, and probably won’t for years. So why is BP the governance poster child du jour? 

“Reputational risk has become the 800-pound gorilla in the room,” says Robert Bostrom, executive vice president and general counsel of Freddie Mac. “Nobody wants to be a BP. Nobody wants to be a Toyota. Nobody wants to be a Massey.”

As the governance sphere grows, it gets hazier around the edges, lapping into areas far beyond simple legal compliance—politics and media for starters. General counsel are asked to provide ever-broader insight, advising the board not just on strictly legal matters, but on the ways that nonlegal problems can evolve into regulatory scrutiny or shareholder suits. Governance realpolitik, if you will.

This is a bigger job for GCs, to be sure, but the good news is their audience is listening. Bostrom, who participates in several informal groups of chief legal officers, says the trends he sees among his peers are clear.

“There’s much more collaboration,” he says, “and a greater willingness to reach out and get help in thinking about these issues.”

In short, the general counsel’s role in corporate governance is more important, nuanced and challenging than ever, and no one sees the trend reversing.

Existential Risk  

In the governance landscape these days it’s easier to see the background than the foreground. Everyone understands the forces affecting corporate governance, but their impact is less distinct. 

“You can draw a straight line from Enron to Sarbanes-Oxley,” says Todd Young, a partner at Hinshaw & Culbertson. “It’s not that straightforward this time around.”

The economy has greatly reduced companies’ appetite for risk, and dramatically intensified shareholder scrutiny, but that’s to be expected in any downturn. A spate of new SEC regulations and the Dodd-Frank Act alter the governance climate, but not in the watershed mode of Sarbanes-Oxley. [At press time a conference report of the Dodd-Frank Wall Street Reform and Consumer Protection Act had passed the House and was awaiting final Senate action, with President Obama expected to sign it into law immediately thereafter.]

That’s not to discount the significance of the financial system reform legislation. Proxy access, say-on-pay, say-on-severance and new disclosure requirements expand the margins of corporate governance significantly.

“The scope of the legislation and all the regulations now go beyond what was traditionally considered corporate governance,” says Matt Lepore, chief counsel for corporate governance at Pfizer. “All of that will create new work, new responsibilities, and that’s not going to just go away when the financial markets get better.”

But the most important aspect of the governance zeitgeist isn’t in the new rules and regs, it’s in the headlines and cable-news crawl.

“Corporate governance issues are broadly now of a much higher profile, and there is a PR side to them that just didn’t exist five years ago,” says Rich Baer, executive vice president, general counsel and chief administrative officer at Qwest Communications. “Today what is absolutely at the forefront of any good general counsel’s mind is not just, ‘What does the law say? How do we comply with the law?’ but, ‘How is this going to play with our shareholders and in the press?’”

The evolution of media culture over the past decade has done as much as anything to affect corporate governance norms. The convergence of traditional print and broadcast media with social networks and the blogosphere intensifies and expands coverage of corporations and stokes the public’s appetite for more. 

“At Qwest, we’ve been under scrutiny for so many years that we’ve always been sensitive to the PR issues,” Baer says, “but it is more in the forefront that whatever decisions we’re making on corporate governance issues do have an external component to them as well.”

Gone are the days when companies could wait out a news cycle and get back to business as usual. If the wrong stars align, they run the risk of becoming the corporate equivalent of Lindsay Lohan. 

“Boards today are trying to identify the existential risks that their companies face,” says Bart Friedman, a partner at Cahill. Friedman focuses on governance issues. “They’re asking what they can do to reduce the risks that could land them on the front page of the Financial Times for 50 days running.” 

Blame Game

There is a chicken-and-egg question as to whether the increased media scrutiny of corporations is a result of egregious corporate behavior, or increased reports of egregious corporate behavior are a result of intensified media scrutiny. Either way, the public’s demand for accountability has never been higher, and that pressure inevitably is expressed politically. 

“The game has changed irrevocably, because we see men and women of true integrity called before Congress,” Friedman says. “The increasing polarization of the American political scene has put every CEO, every board, every general counsel on notice that conduct can be perceived through the prism of a senator or representative who wants to make a headline. The news cycle has changed, the political cycle has changed, and I cannot imagine it going back.”

The intersection of media, politics and governance issues has created a toxic atmosphere in Washington. Governance experts lament the tenor of discourse on Capitol Hill and attribute the reflexive finger-pointing and vengeful invocation of criminal consequences to the rise of a breed of populism on both sides of the aisle that panders to emotions above all else.

“You’d be hard-pressed to find an era in American history where there has been as much public vilification through congressional inquiries and hearings,” says a general counsel who spoke on condition of anonymity. “You have an outraged American people, a media ready to take advantage of that anger, and you have elected officials willing to vilify—effectively trying to criminalize—what was traditionally not viewed as criminal conduct. That combination of things has made boards very skittish.”

While the vilification of corporate officers may gratify a public that is understandably frustrated, it complicates the governance efforts of corporations and clouds effective risk management. Counsel are left to weigh actual legal requirements against public perceptions and threats to the company’s image that can do more damage than actual violations.

“If the board asked, ‘do we have a legal obligation to manage risk, as opposed to oversee how management manages risk,’ I would be safe in concluding that the consensus answer is no,” the general counsel says. “You don’t have a legal obligation to manage risk. You have a legal obligation to oversee and to ensure that there are policies and procedures in place for risk-identification and mitigation and management.”

Boards increasing focus on reputation issues adds the burden of another layer of questions and concerns for management—with few easy answers at hand. But that doesn’t mean executives are the only ones under the gun.

The Onus on Legal

Embedded in every question of the right process and structure to adopt are questions of how well each party is equipped to manage risk. 

“Arguments can be made that perhaps we need people with better risk-management experience on boards,” says Michael Bisignano, general counsel of Online Resources, an online banking and electronic payment provider. “Simply having industry experience, while valuable, may not be enough.”

Board members with broad risk-management experience in addition to an industry background are at a premium these days, as companies try to anticipate and avoid problems with landmine potential. 

“Clearly there are opportunities to enhance board effectiveness with candidates who are better able to extract risks from the information they receive and provide management with better guidance,” Bisignano says. “Even that may not match up well with solving the global problem of managing systemic risk because the tolerance of the shareholders may not equate to the systemic tolerance.”

In a sense, the financial system reform legislation is an effort to manage risk on a national scale, albeit one that doesn’t offer much guidance beyond the basics.

“I don’t see the regulatory reforms as being anything other than process-oriented,” Bisignano says. “For the most part, they tell boards of directors what they have to do in response to a problem. The real meat of the question, though, is: How much risk is acceptable? What types of risk are acceptable? The regulations don’t give you much direction on that.”

Still, somebody has to make the call—someone needs to pull information and insight from disparate sources and offer real guidance. The onus, Bisignano says, increasingly falls on the general counsel.“

General counsel need to be much more broadly focused because directors are looking to them for broader guidance. They still want the procedural guidance—the right method—but they also want more substance because they are looking for the boundaries.”

New Agency  

Traditionally, general counsel have had a lot of responsibilities in corporate governance but not a lot of authority. As the gatekeepers, the compliance gurus and reporting requirement experts, GCs were there to answer specific questions, advise the board on discrete matters and basically keep companies on the right side of the law. 

These days they are asked to do a lot more.

“The general counsel really has to be an initiator, somebody who can put on a full agenda,” Friedman says. “The general counsel becomes someone who helps write the script for the directors, because he or she is an active participant in creating a conversation dealing with the risks of the company. It’s a much more active role.”

Beyond knowing their industry back to front and the full spectrum of legal requirements, general counsel today need to know what’s going on in Washington, in Brussels and in the court of public opinion. That advice may sound like plain common sense, but the tone-deaf response by companies to recent crises demonstrates that not nearly enough management teams have taken it to heart.

As general counsel are asked for greater synthesis in the counsel they provide, they have the opportunity to provide greater and much needed value to their client. And they have the training for it.

“The risk-analysis you learn as part of legal training is a very valuable tool,” Bisignano says. “Many lawyers are put in a position of applying it only in terms of a risk-elimination process, but that’s not really risk management. Risk management is differentiating between good risks that are worth taking and bad risks that harm your business. You try to encourage the former and mitigate the latter.”

Lawyers often wistfully observe that law school was more varied and intellectually demanding than the day-to-day business of being a lawyer. Today’s governance challenges, however present the kind of full-spectrum dilemmas law students could only dream of. 

“In 2010, the effective general counsel have to be a lot more than merely a careful lawyer,” Friedman says. “They have to be proactive, thoughtful, constructive, forward-thinking, broad-minded individuals who are legally trained. They need to have a broad sense of trends, and an anticipation of where they think our elected officials will be focused ahead of time.”

Sounds interesting.