Corporate Counsel

Front and Center

by Michael W. Peregrine
August 1, 2008

No member of any organization is more responsible for its legal well-being than the general counsel, and most of us would assume that of all its personnel, no one would be more completely in the loop on its doings. And yet, as the recent governance controversy involving the Smithsonian Institution demonstrates, some chief executive officers at nonprofits seem to regard their top lawyers as little more than potted plants. An internal investigation at the Smithsonian (prompted by public controversy) blamed significant governance problems on what was termed the autocratic management style of the CEO. Of particular concern were the CEO's efforts to reduce the organizational influence of the office of general counsel.

According to the internal investigation, the office of general counsel was isolated from the board, was denied any meaningful role in executive oversight, and saw its staffing reduced while its workload increased. Furthermore, the probe showed that the CEO didn't properly understand the GC's role, or failed to take it with sufficient seriousness. The CEO ultimately resigned, and sophisticated new governance policies subsequently adopted by the board served to firmly reestablish the prominence of the general counsel within the organization, and especially with the board. Arriving at a model of better oversight didn't have to be this messy.

Traditionally the not-for-profit sector has been behind the curve in giving general counsel the oversight responsibilities they warrant. However, the Smithsonian controversy and other, similar developments speak clearly to the importance of enhancing the organizational profile of the nonprofit general counsel. This vision has gained a sense of momentum with the recent Delaware decision in Miller v. McDonald, attributing fiduciary duties to the general counsel regardless of whether he or she is a board member.

For these and other reasons, the nonprofit sector and its arguments in favor of self-regulation would be well served by fashioning the general counsel position along the lines of the "guardian of the corporate reputation" model long championed in this magazine. The following discussion proposes a nine-step process by which the nonprofit board and executive leadership can work together to achieve this goal:

The first step in this process is for the board to clearly communicate to key corporate constituencies the importance it attributes to the role and function of the general counsel. This is the proverbial action of establishing the "tone at the top," generally accepted as a prerequisite to effecting proactive cultural change within an organization. While it may require educational efforts to help the board reach a comfort zone on this point, the resulting basic commitment to talk the talk and walk the walk will be obvious to both internal and external observers. The remaining steps below generally reflect practical aspects of this overarching action.

For example, it can prove very beneficial to query candidates for key executive positions on their willingness to support a strong internal role for the general counsel. Basing executive hiring decisions in part on this criteria would represent an outstanding example of the board's willingness to walk the walk.

The board and executive leadership should combine to support the role and function of the general counsel, as a manifestation of the broader organizational commitment to a culture of legal compliance. This mandate would include a confirmation of the general counsel's prominence in the organizational hierarchy, and of its reporting relationship (i.e., to both the CEO and to the board).

A critical step is to craft the general counsel's job description with precision, making it clear that he/she is responsible for all legal affairs affecting the organization. The GC should have a specific, coordinated relationship with the corporate compliance office if it is a separate administrative function. And take care to avoid adding to the general counsel's job description ancillary duties (e.g., human resources, public relations) that have no obvious relationship to legal controls and that would be dilutive of the general counsel's ability to focus on legal risk profile concerns.

This seems like an obvious point, but hire as general counsel an individual whose qualifications, experience, and stature are consistent with the size of the organization, the complexity of the legal environment in which it must operate, and its legal profile history. Nothing is more indicative of organizational indifference than entrusting the general counsel position to an attorney who lacks the necessary experience and qualifications. Similarly, the board should periodically inquire as to the adequacy of the general counsel's budget and staffing.

Grant the board (or a committee thereof) the power to ratify (or otherwise directly participate in) the hiring and firing of the general counsel. Such authority accomplishes three important goals: First, it provides a fail-safe mechanism in the event that the CEO proposes an unqualified or otherwise weak candidate; second, it ensures that the board will have the opportunity to evaluate the circumstances that prompted the general counsel's termination; and third, it confirms the dual reporting relationship described above.

A closely related step is to allow the board the authority to ratify the compensation of the general counsel. This control helps ensure that reasonable compensation, commensurate with the significance of the position, is being paid. It allows the board to protect against "lowball offers" that suggest either CEO indifference to the position, or an unqualified candidate.

Another important action is providing the legal department with enhanced access to the board. The general counsel should be directed to attend all meetings of the board and of key committees (e.g., executive, compliance, audit, executive compensation). Similarly, the general counsel should be authorized to communicate directly with board or committee members as may be necessary, without going through the CEO. The new Smithsonian policy provides an excellent model.

A final step would be to advise all members of the executive team that, to the extent they directly engage outside counsel without working through the general counsel, outside counsel must be directed to communicate with the general counsel concerning the scope of their engagement, the advice given, and whether the outside counsel becomes aware of particular legal risks confronting the corporation.

In today's legal environment it is increasingly incumbent on the nonprofit board to take action to ensure the organizational prominence of the office of general counsel. Place your GC front and center, on any and all crucial and controversial matters, so that a high-level, accountable professional is in place to assure that the organization has the oversight in place to head off your own Smithsonian meltdowns before they ever see the light of day.

Michael Peregrine is a partner in the Chicago office of McDermott Will & Emery. He concentrates his practice in the representation of nonprofit organizations on corporate, governance, and tax matters.