On November 30, 2006, the New York City Bar Association’s Task Force on The Lawyer’s Role in Corporate Governance released an extensive report examining the role of lawyers representing public companies in corporate governance matters.
The 30-member Task Force was chaired by Kramer Levin partner Thomas H. Moreland. Also actively involved were partners Peter G. Smith (Secretary/Subcommittee Chairman) and James A. Grayer (consultant), as well as associate Scott R. Weiser (Assistant Secretary).
A key focus of the report was to examine the role of general counsel in protecting a company and its investors against the risk of illegal or unethical conduct. The report includes a series of “best practice” recommendations to strengthen and facilitate the position of general counsel, including:
- requiring Board approval of their hiring, compensation and discharge;
- emphasizing their function in promoting legal and ethical compliance within and by the company, and ensuring that they have the resources necessary to perform this function;
- defining their role specifically to include alerting the Board and other appropriate decision-makers to potential significant law violations;
- ensuring that they are seen as senior, influential, and respected officers within the company and have the reporting relationships, access to management and directors (including non-management directors), and compensation consistent with such senior status; and
- providing them with the ultimate authority in the selection of principal external lawyers. The report also includes best practice recommendations, in the context of minimizing the risk of corporate wrongdoing, with respect to:
- the role of outside lawyers and law firms, including the need for law firm written policies to encourage the “reporting up” of perceived problems, as required in some circumstances by SEC rules under the Sarbanes-Oxley Act;
- the role of inside and outside lawyers concerning a company’s financial disclosures, including the benefits to the client if its lawyers understand the accounting concepts impacting such disclosures. The report also makes detailed recommendations with respect to the conduct of internal investigations, emphasizing the client’s decision making authority and the importance of investigating counsel being independent of any accused wrongdoers.
Finally, after examining the publically known facts concerning several recent scandals, such as Enron and WorldCom, the report urges that New York amend its lawyer ethics rules to permit a lawyer to “report out” threatened corporate wrongdoing if confronted with the “very rare” circumstance of a Board failing to act in response to a “report up” of fraud or illegal conduct threatening to cause substantial injury to the client company.
The full report, an executive summary of the report and the Bar Association’s press release are currently posted at www.nycbar.org/CityBarReport.htm.