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The latest wave of corporate scandals proves that legal risk management must have a bigger role in corporate risk management programs. Legal risks are increasing, but corporations are feeling overwhelmed. Since they are spending money and hours satisfying layers of federal and state regulations, one more layer may be just too much to bear. Yet this is a perfect time to determine how to coordinate risk compliance so that legal risk is part of the program. In fact, every law department should create a legal risk management program. It improves corporate governance and helps companies think about the focus placed on risk management by ratings agencies and regulatory authorities. In particular, companies operating in heavily regulated industries have an even greater need for effective legal risk management. An examination of recent corporate scandals suggests that corporate counsel dropped the ball on legal risk, at least some of the time. Why? Part of the reason is poor management of staff or outside counsel. When management creates pressures, the legal department may end up violating laws or regulations and even expose the company to costly litigation. Numerous recent developments illustrate how a top-down approach to legal risk management might have limited a whole range of criminal, regulatory, and civil liability exposures. A recent Wall Street Journal article reporting the resignation of Coca-Cola’s general counsel (which was later rescinded), suggested that some board members were unhappy with the general counsel’s handling of two government probes into alleged accounting fraud and a shareholder suit. One probe involved allegations that Coca-Cola engaged in practices that led to overstating its financial results. Would a thoughtful legal risk management plan at Coca-Cola have mandated that the general counsel take a stronger hand? In two other big scandals, general counsel’s offices and outside lawyers were implicated in the Enron and Global Crossing cases. The now well-known case of Global Crossing underscores the need to include procedures for management of internal and outside counsel relationships in any legal risk management program. It also illustrates the pressures on corporate counsel to give the “right business answers” to senior management. An August 2001 letter from a Global Crossing financial officer to Global Crossing’s then general counsel alleged that the company was engaging in certain fraudulent accounting practices. The letter was neither disclosed to Global Crossing’s auditors nor to the audit committee. The general counsel said that he had given the letter to the company’s outside law firm. The relationship partner from that firm was the lead adviser to Global Crossing for securities matters. That same attorney later became acting general counsel of Global Crossing, as reported in the July 2003 American Lawyer. A subsequent investigation into the accounting fraud allegations was assigned to the acting general counsel and his law firm. That investigation later became the subject of a Securities and Exchange Commission investigation. In the end, the law firm paid a multimillion-dollar settlement. It is now old news that those accounting irregularities forced Global Crossing into bankruptcy proceedings. Global Crossing provides a snapshot of an egregious absence of legal risk management. In a recent probe involving hedge fund trading, the Office of the New York Attorney General said that “the legal profession’s role in the fund scandal is being scrutinized,” according to The Wall Street Journal. Once again, a legal risk management program might have prevented these problems. Regulated industries, such as insurance, should be less exposed to the types of scandals that have recently shocked investors. Yet the insurance industry has experienced many of the same difficulties, which might have been avoided with better corporate governance, including, once again, legal risk management. Finally, in light of the Sarbanes-Oxley Act, it is hard to imagine that, without a legal risk management program, corporate counsel can fulfill its responsibilities to the company or provide an adequate forum for audit committee members for their concerns about corporate governance and compliance issues. In fact, legal risk management practices can actually offer a solution when corporate counsel feels unduly pressured. Counsel for companies subject to Sarbanes-Oxley now must take measures to prevent and report certain abuses or resign where no appropriate response is forthcoming. The responsibility of corporate counsel for proper legal risk management must include compliance with laws and regulations and anticipation of new litigation exposures. This is true even where certain compliance functions are delegated to nonlawyers. An effective program requires coordination of nonlegal and legal functions. Too many corporations currently have a patchwork quilt of compliance programs. And because of that patchwork quilt, legal risk management gets shortchanged. Legal risk management starts with “knowing the rules” and ends with sanctions for violating the rules. The result can be a well-coordinated and integrated legal risk management leadership to non-legal staff and senior management. Legal risk management, then, needs to be embedded in existing compliance programs. Legal risk management can best be explained as the law department taking responsibility for the following: 1. Knowing, tracking, and interpreting all applicable legal requirements. Many of these functions may be delegated to nonlawyers, but the general counsel’s office must ultimately be accountable. 2. Assuring that those who must be familiar with legal requirements receive the information on a timely and useful basis. This requires coordination with appropriate business units and the IT department. 3. Assuring that senior management and the board understand their roles in reviewing and endorsing the effectiveness of compliance programs. This requires some education of senior management on legal issues, especially in the “gray” areas. 4. Establishing reporting structures for all internal and external counsel to avoid putting lawyers in the position of compromising best practices. 5. Training lawyers on how to serve their clients and participate in decision making, while creating internal mechanisms to enable staff and outside lawyers to react when a client crosses an ethical line. 6. Establishing standards of excellence, which should include peer review and systems to assure that advice is consistent. 7. Establishing protocols and training for staff and outside counsel on when external advice should be sought and procedures for presenting such advice. These steps should not require a new layer of bureaucracy. Rather, they should be incorporated in an existing compliance/risk management program. The implementation of a legal risk management program should begin with an audit of existing reporting structures for internal and outside counsel and current training and communication programs. The audit would include interviews and review of systems and written documents. The purpose would be to first understand the current framework for your company’s legal risk management. Although you may not currently use the term, certain legal risk management practices must already exist within your company. Now it’s important to learn about current compliance programs to ascertain how legal risk management might best fit within existing risk management structures. Another result could be consolidating current compliance programs and improving efficiency and effectiveness in the process. Cecelia Kempler was co-chair of LeBoeuf, Lamb, Greene & MacRae’s insurance practice, chair of its life insurance practice, and served on its executive committee until she retired from the partnership on Dec. 31, 2003. She serves on the board of a major life insurer and on its audit committee, and has written and spoken extensively on insurance industry issues.

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