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These have clearly not been easy times for the public company general counsel. A great number of the current corporate governance and accounting-related scandals have, unfortunately, involved allegations of either substantial misconduct or, at minimum, poor judgment on the part of corporate counsel both within and outside the organization. The potential impact of these allegations on a company lawyer is substantial, both personally and professionally. Allegations of either misdeeds or mere negligent conduct can be devastating to the professional involved, whether proven or not. Given this climate, how should the lawyer conduct himself or herself in providing appropriate representation to avoid career-ending consequences? To advise the corporate lawyer properly on how to protect both personal and professional reputation, we must first consider what those who have been tarnished by recent scandal did inappropriately to place themselves in harm’s way. Unfortunately for the profession, a number of company counsel probably actively participated in management’s fraudulent conduct as alleged by the plaintiff classes. They were active co-conspirators in the financial frauds and profited by excessive and unearned salary grants and other ill-gained perquisites, and through the propitious sale of company stock and exercise of stock options at the height of the market, knowing full well that the company’s financial fundamentals could not support such lofty equity valuations. By selling, these individuals took advantage of inside information and acted improperly, both ethically and legally. Of course, in this kind of situation, my advice to counsel is very simple: Don’t be a fool — act honestly and don’t self-deal! This is really quite obvious and doesn’t merit great time and attention in this column. The more difficult situation involves the corporate counsel who inadvertently becomes enmeshed in a situation that becomes uncontrollable. Typically, such a situation involves some kind of serious managerial misconduct. In those situations, the corporate lawyer either through negligent inaction or simple blind allegiance to the officers involved, fails to recognize the fraudulent conduct and does not protect either the board, the company or himself from the severe consequences of management misdeeds. This is the individual to whom this article is addressed. What should or can one do to avoid such a situation? What steps can be taken and what attitude is necessary to prevent such a dire result? The first and most important point is attitudinal. The ethical obligation of the company’s lawyer is to the company and its board, period. While this concept is relatively simple in theory, in practice it is a bit more complicated. The in-house general counsel is, after all, a company employee. And in the hierarchy of most public companies, he or she reports to the chief executive officer. The CEO has the power and authority to hire and fire the general counsel. This reporting relationship puts the individual in a most difficult position. Although, in theory, the lawyer owes his or her primary obligation to the client, which is the company and its board, as an employee reporting to the CEO, that individual may find himself or herself being considered by the CEO as a personal attorney. Obviously, this creates a terrific potential conflict of interest when the CEO’s and the company’s interests diverge. The lawyer can be caught between two clients, each with potentially conflicting interests and expectations. It is precisely this kind of situation that has devastated the careers of those individuals caught up in the most recent corporate scandals. When forced to chose allegiances, they have turned to the more powerful personal figure, the CEO, and have basically ignored their obligations to the company itself, blurring the distinction between CEO prerogative and the company’s best interests. Such a situation inevitably leads to the shielding of the board from bad news involving management and the betrayal of one’s good judgment in the legal opinion that a legally and morally questionable activity has met applicable standards. Bending the rules to satisfy one’s client is never good legal judgment and doing so to satisfy one’s employer is not any better. My advice here is quite simple — as difficult as it may be, always remember that as the company’s lawyer, your primary obligation is to the company and its board. Your job is to protect the company’s interests — if forced to choose between supporting the CEO or the company, always choose the company. In the end, you will have done the right thing and will have earned the respect of both your client and direct superior. And, if on a difficult issue you face resistance from the CEO, go to the board and explain the problem. If the members are truly independent and loyal to the company, they will almost always support your position, if legitimately considered. Compromising your ethics for a client, no matter how important, is a potentially fatal move, whether in private practice or as company counsel. Continually remind yourself, particularly in difficult situations, that you represent the company itself, not the individual temporarily clothed in the authority of the CEO. If you use this concept as your guidepost, you will do the right thing for both the company and for you personally and professionally. The second way to avoid a corporate governance disaster is more procedural in nature. My point is twofold. The first deals with a potential problem that can clearly be avoided. The second involves problem mitigation. Several of the corporate meltdowns of the past few months seemed to revolve about a common avoidable theme — the conflict-of-interest transaction gone astray. Officer — or director — conflict transactions are always problematic in nature. Corporate law has traditionally frowned upon such actions. The fairness review, typically raised in these cases, is fraught with difficulty for company counsel and the organization. The procedural requirements that must be met to demonstrate that a transaction is fair to the corporation creates a virtual minefield to be negotiated. And, even if such procedures are carried out, the transaction may, in hindsight, appear grossly unfair to the corporate entity and create the impression of undeserved management enrichment, which has both legal and reputational significance. Of course, the company’s lawyer who structured the transaction to meet the appropriate legal standards will find himself or herself under attack by the shareholders and blamed by the board for what appears now in hindsight to have been a problematic move. The lesson for corporate counsel is simple — avoid conflict transactions at almost all costs. They bring you little other than danger and misery. And, if it is absolutely necessary to proceed, do so with the greatest care and heightened transparency. The better known and explained the transaction is to the public, the greater the likelihood of acceptance. The conflict-of-interest problem is relatively easily avoided — but what about fraudulent conduct within the organization. How may the general counsel avoid this destructive condition? The simple answer it that he or she can never, at least through individual actions, completely avoid fraud. Fraud is as old as humankind. We can mitigate against the effects of fraud, but in the end, like illness, it will always be with us. The greatest fear of the corporate counsel is not being harmed by what one knows, but injury from what one doesn’t know. This is the insidious nature of corporate fraud. That horrible phone call comes when you least expect it, apprising you of disaster, not even remotely of your own creation. So what can one do? The establishment of proper systems and controls within the organization, including a well-conceived internal audit function and straightforward compliance procedures, is a start. Also, insisting on independent external auditors, reporting directly to an independently composed audit committee of a substantially independently composed, long-term equity-holding board is equally important. However, the mere presence of proper process is never good enough. Setting a tone at the top emphasizing ethical behavior within the organization, as well as insistence by counsel that the process is not merely form-based, but genuinely and spiritedly attended to by the organization, are a must. This will not always prevent fraud, but will discourage its emergence and hasten its detection and eradication. Additionally, long-term equity ownership throughout the organization will aid in that it will create a stake in the enterprise amongst all employees. This will encourage vigilance, as fraud is ultimately destructive to the organization’s long-term health. While these have been difficult times for corporate counsel, the necessary change in organizational behavior and attitudes that they may engender will ultimately lead to better practices. As a company’s lawyer, you can provide a major impetus in making ethical conduct a reality in your business and, in the long run, a healthier enterprise. Charles M. Elson is the Edgar S. Woolard Jr. Professor of Corporate Governance and director of the Center for Corporate Governance at the University of Delaware, of counsel to Holland & Knight and a member of the board of directors of Alderwoods Group Inc., Autozone Inc., Nuevo Energy Co. and Sunbeam Corp.

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