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The criminal trial of Former Tyco GC Mark Belnick raised many legal and ethical questions for in-house counsel. When should they “report up the ladder” to the board possible CEO misconduct? How should any special bonuses and loans they receive be accounted for? How familiar should they be with their company’s bylaws? While the sweeping corporate reform law of 2002, the Sarbanes-Oxley Act, addressed some of these issues, in many cases, the answers aren’t black-and-white. For more advice, Corporate Counsel spoke with a few corporate governance experts. We talked to David Becker, a partner in the Washington, D.C., office of Cleary, Gottlieb, Steen & Hamilton, and a former general counsel of the Securities and Exchange Commission; Graef Crystal, a San Diego-based author and columnist on executive compensation; Susan Koniak, a corporate law professor at Boston University School of Law; and Nell Minow, an attorney and a co-founder of The Corporate Library, an independent research firm in Portland, Maine, that provides corporate governance information. Here are their responses, which were edited for brevity: Corporate Counsel: The prosecution claimed Belnick knew of questionable conduct by Tyco’s CEO and CFO, but failed to disclose that information to the board. Does a GC have a legal and/or ethical duty to “go up the ladder” if he believes there is official misconduct by top executives at his company? Koniak: It’s both a legal and an ethical duty. You can’t sit around if [senior executives] are breaking the law — even if you don’t necessarily believe it, but there is evidence that it is true. Legally, it is negligence at a minimum to be careless about whether your client, the company, is being harmed by one of its agents. As for going up the ladder, you must speak up and suggest that something isn’t right. Even if the whole board knows about it, the lawyer can’t just sit by. Your duty is to try your hardest to suggest going to people [i.e., outside counsel] to be sure if it’s legal. Otherwise, if there is, say, a bankruptcy, you could be sued for negligence by the bankruptcy examiner. There is no duty in most states to disclose [senior executives' possible misconduct] outside the company, and the SEC does not require it. No general counsel should [disclose outside] without first seeing a lawyer to seek advice as to liability personally. It is privileged and not a disclosure violation to discuss it with your own attorney. If you acted in assisting something that you didn’t realize at the time or believe was criminal, but you now realize that, oh, my God, this looks like it’s a crime — you are at risk of being prosecuted for aiding and abetting a crime.” CC: Belnick received special bonuses and loans from Tyco’s CEO. Is a GC supposed to report large bonuses and loans on the directors and officers questionnaires that are used for proxy filings? Does a GC have a legal and/or ethical duty to go up the ladder or to the SEC if he discovers that his pay and other compensation are not reported to the SEC? Minow: Whether or not you must report on the questionnaire depends on whether you are one of the top-five paid executives. [If you are among the top five], then yes, if [your compensation is] not reported to the SEC, it is your duty to go up the ladder to the board. The general counsel must ask two questions: “Who is my client?” and “What is my role here?” The answers become obvious. The corporation is your client, and your role is to legally represent and protect it. Crystal: The SEC’s position is “we don’t care how much you pay [senior executives] as long as you report the top five.” Of course, companies have found stratagems to “engineer” an officer’s pay so he isn’t in the top five. They reclassify some pay and call it something else. CC: During the trial, Belnick said he had not checked Tyco’s bylaws and rules to see if he was entitled to the compensation, nor did he review board minutes to see if those monies were properly disclosed to the board. Does a GC have a legal and/or ethical duty to learn the bylaws of a company, to research rules dealing with special compensation, and to review board minutes? Becker: Most general counsel are generally familiar with bylaws, but I would expect that few have committed all to memory. Special compensation arrangements [are] generally the responsibility of the compensation committee of the board. The large majority of the time, board minutes are pretty routine, and I wouldn’t expect seeing many general counsel spending a lot of time scrutinizing minutes. While the general counsel is an adviser, he is not principally a policeman. Koniak: Of course, you have to be competent. It’s the first ethics rule in every state. How could you be a general counsel and not know your company’s bylaws? It’s negligence. Now we know there are real legal issues around special compensation, because it can signal self-dealing. If it’s going on, you have an obligation to [check it out]. If necessary, you can go to an outside attorney or go up the ladder, but you have to take some action. If I were a general counsel, I would think it quite wise to review board minutes to know what was disclosed to the board and what was approved. It should be part of the general counsel’s function. It would be careless not to [know what happened at board meetings]. Certainly it’s not good practice; it could give rise to a negligence claim if tied to some harm to the company.

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