This is an amended version of an article which first appeared in the April 2010 issue of PLC Magazine.
The traditional role of the in-house lawyer is changing. Unprecedented levels of new, complex legislation and an increasing gap between innovation and developments in the law are creating sources of additional legal risk. In addition, regulation is becoming increasingly principles-based, looking to outcomes rather than processes (for example, the Bribery Act).
This means that the in-house lawyer is no longer advising on the application of a static set of rules to business scenarios, but must now advise on the development and implementation of these scenarios and related risks. As a result, company executives are waking up to the increasing strategic importance of the in-house legal team as the “moral compass” of the company, as they are uniquely placed to look beyond the legal issues to the social and ethical consequences of a management decision (see “In-house perspectives” below).
Principles-based regulation is an international phenomenon that has been increasingly adopted in the EU and North America. In the UK, the Financial Services Authority has developed principles to encourage businesses to focus on how they can best serve customers. Recently, the Solicitors Regulation Authority announced plans to introduce a similar regime for legal services.
Principles-based regulation comprises three key elements:
- Broad-based, qualitative standards to be applied flexibly to changing industry in preference to more rigid, detailed, prescriptive rules. The standards tend to be overarching and enable enforcers to police the “spirit” of the rules, avoiding the need for rules to anticipate every possible situation.
- Outcomes-based regulation, specifying the outcome required but leaving the specific measures to achieve that outcome to the discretion of the company. The regulators will often provide guidance on what those measures should include.
- Increasing senior management responsibility with an intensified reliance on the board of directors to lead and “set the tone from the top” on behavioural standards, embedding a culture of high ethical standards in their company’s strategy and operations. Implementation requires use of existing programmes or the development of new initiatives. The effectiveness of these programmes must be monitored regularly.
An example of principles-based regulation in practice will be the Bribery Act.
The Act will make it a criminal offence to bribe another person or to be bribed (the general offences), and creates a specific criminal offence of bribing a foreign public official to obtain or retain business. Organisations could be prosecuted on a strict liability basis for failing to prevent bribery if they cannot prove that they have “adequate procedures” in place to prevent such illegal payments. Directors will have a corresponding civil liability.
There are a number of uncertainties. Under the new strict liability offence, organisations will be liable for the actions of those “performing services” for them or on their behalf. This could extend to a range of intermediaries and joint venture partners, regardless of any control element. Pre-existing arrangements will be particularly problematic.
The test of “improper” conduct in the two general offences involves an assessment of whether the person performing the relevant function or activity was expected to perform it in good faith, impartially, or in a position of trust, but it is unclear in precisely which circumstances a court would treat such an expectation as arising.
In addition, the Act does not deal with facilitation payments (relatively insignificant payments made to facilitate or expedite performance of a “routine governmental action”), and the circumstances in which a person making such payments will or will not be prosecuted are not clear. What type and value of corporate hospitality will be prohibited and what amounts to an “intention to influence”? Prosecutorial discretion will therefore be key.
The UK government will provide guidance for commercial organisations on preventing bribery and, in particular, on the “adequate procedures” defence. The guidance will set out relevant principles backed by good practice examples to help organisations develop procedures that are appropriate to their own circumstances and business sectors. However, it is unlikely that the guidance will be very detailed or prescriptive. What is required is a tailored approach that takes into account the nature of the company, its operations and the jurisdiction in which it operates.
In the context of the changing approach to compliance, in-house lawyers will need to:
- Give definitive pragmatic advice on what can and cannot be done to protect and help create value for their organisation;
- Investigate fully the context when advice is sought (that is, no snappy “yes” or “no” answers or “box-ticking”, instead thinking through how to comply);
- Be involved in a wide range of business decision making at an early stage as key commercial team members;
- Turn principles into sets of internal rules and guidelines;
- Adapt internal training and consider how far it needs to move beyond simple “dos and don’ts”;
- Monitor and demonstrate compliance (that is, to be able to demonstrate retrospectively to enforcers that proper procedures were followed and the reasons for why particular decisions were taken);
- Build relationships with regulators, facilitating a cooperative and educative approach to supervision;
- Coordinate the internal control functions within their organisation (including legal, compliance, financial, marketing, operational, creative and other disciplines) and manage ethical, compliance and reputational issues at the centre of the business; and
- Assist in the development and implementation of an organisation’s policies and processes to achieve the outcomes set out in the Act, if enacted. This will involve tailored risk analysis, policies, systems, sanctions, training, help lines and monitoring as well as engagement with regulators and enforcement authorities.
Deepak Malhotra, Senior Vice President and General Counsel, Constellation Europe
The role of the in-house counsel has changed enormously over the past few years. As important as the need to bring clear and concise legal advice, is the absolute need to ensure this advice is pragmatic and helps the business achieve a solution and progress. Legal counsel more than ever need to understand the critical issues and key initiatives of their organisation. They need to navigate the organisation through complexity, regulation and legal risk. Crucially, the most successful in-house counsel need to do all these things whilst living the values and culture of the organisation.
The role must operate from the heart of the organisation, and in-house counsel need to lead. Leadership is not just confined to the legal agenda, but a transformation is needed to help and allow in-house legal to lead the business. The chief financial officers have achieved this, so why not the general counsel? It is happening today, but I believe that the future evolution of the role will be based on greater leadership and ownership of those issues which create value for the organisation as opposed to simply protecting the organisation. In-house lawyers will need to use their networks as much as technical skills, and will need to find new ways of managing external counsel as internal management expectation increases.
The in-house legal community has become a fantastic market for talent: legal, business and leadership talent. The future of the role lies in making each aspect of these work successfully.
Robin Saphra, Group General Counsel, Colt Telecom Group Limited
Lawyers must help to drive business. While naturally applying skills and knowledge to ensure legal and wider compliance, it’s much too one-dimensional for lawyers to be seen as an encyclopedia of rules. In-house lawyers should scope and develop business roadmaps at the centre, providing sound advice along the way, but fundamentally pursuing and enabling core business objectives as true commercial team members.
Mark Serfozo, Chief Counsel, Compliance and Regulation, BAE Systems plc
The way in which businesses behave and the effect that this has on their reputation is the key issue facing in-house counsel today. Applying judgement is a key skill of in-house counsel and this gives them an advantage over their business colleagues when dealing with ethical and reputational issues. In-house counsel must position themselves appropriately in their business so as to be effective in dealing with these issues. If they succeed in managing ethical, compliance and reputational issues, then they can bring a competitive advantage to the business which they serve.