Ciarán Fenton explains why in-house counsel teams are missing an opportunity around ethics.
‘Most lawyers take ethics – speaking up and doing the right thing – very seriously … and you won’t make many friends if you suggest otherwise.’
This was the response I received from one GC when I mentioned I was writing a piece suggesting that they should do more when it comes to ethics management.
Let me be clear from the start: I’m not saying they don’t do enough. I am saying that many lawyers appear, for good reasons, to care much more about, and have more energy for, risk management than ethics management. The key word here is ‘more’.
At least, that’s my impression after working with in-house teams for many years. I’m aware that most organisations have compliance functions and some even have integrity or ethics functions, but work on ethics tends not to be a priority. I also know that the subject of ethics is entwined with a company’s values and culture.
My point is that there is a very good reason why in-house counsel spend more time on risk management – because it’s measured, to some extent, and people tend to deliver on only what’s measured.
One definition of ethics is: ‘… a set of moral principles that govern a person’s behaviour or the conducting of an activity.’ In this context, it becomes obvious why broader work on ethics isn’t easily measured. In-house teams are under enough pressure doing more for less without inviting more work. The over-worked GC can argue rightly that ethics is the responsibility of everyone in the business, not just lawyers.
Yet, poor conduct creates legal risk. Conduct is defined as observed behaviour over time. Poor conduct is poor or unethical behaviour observed over time. So why isn’t ethics management a core part of Legal’s strategy, to the extent that risk management is?
The answer is that there is neither a financial nor an emotional incentive for it.
The recent high profile corporate ‘risk events’ which involved seriously unethical behaviour by senior executives were, in part, due to a failure to anticipate and avoid the conduct which led to wrongdoing. With hindsight, would the CEOs of those companies have approved a much greater legal spend on reducing conduct risk, if it was mandatory to confront the high probability of such events occurring in advance?
One CEO said to me many years ago: ‘“All I want from Legal is that they anticipate risk.” “Is that all?” I thought. And what crystal ball were they going to provide in-house with to do this? Isn’t risk anticipation a joint endeavour? Is that not the reason that in-house exists?
By now, conduct risk should be a familiar term, particularly in the financial services sector, since conduct has been heavily regulated following the global financial crash.
But it’s not working.
Earlier this year, the Banking Standards Board published its second annual review, in respect of which, the Financial Times ran the headline: ‘Bankers battle with ethics versus career quandary’.
Based on a survey of 28,000 employees at banks and building societies, ‘more than a third fear negative consequences of voicing concerns … one in eight had seen instances where unethical behaviour had been rewarded… [a large number saw] a conflict between their organisation’s values and how it did business’.
‘Conduct’ has been commoditised as a term, reduced to a box-ticking exercise, just like ’board effectiveness’. Unless and until the business honours the spirit as much as the letter of the law, nothing will change and it’s only a matter of time before we open our newspapers to read about the next avoidable corporate scandal.
If a company’s risk register is a list of top and emerging business, legal and reputational risks, it follows that conduct by directors should go right to the top of that list, because most risks are forged in the crucible of boardroom relationships.
The topmost risk is the systemic weaknesses in board decision-making and governance, due to the failure of each director to change their worst behaviour and exploit their best.
What if the legal function, in addition to the regular ‘calling out’ it currently does as part of BAU, addressed this matter head on and became an agent of conduct change and demonstrated a link between improved conduct and reduced legal risk? Would that not make easier the annual battle of the GC making the business case for legal spend?
My proposal is that you, in your role as in-house counsel, can choose to change the status quo. The incentive to do so is threefold:
I have spoken and written about this many times (see my pamphlet ’The GC-CEO Relationship post Global Financial Crash: Flourish or Flounder?’). I help GCs and CEOs to grapple with these issues in the first 100 days of a new role, so I am familiar with the arguments from both sides.
GCs often fail to confront CEOs with the truth that they cannot do 10 things for $7, if 10 things actually cost $10. Often, they retreat to the ‘diving catch’ mode drummed into them at law school, which is that you get it done, no matter what. This behaviour has a knock-on impact on the time available for ethics management.
I acknowledge that many lawyers disagree with me on this point and feel that the 10 for seven argument is a red herring. Some feel it’s an affront to their professional code of doing what needs to be done. I respect this view, but disagree with it.
I propose three actions:
1. The CEO should accept that they are, de facto and whether they like it or not, the chief ethics officer, all lower case.
2. The GC should help the CEO to publish a company-wide ethics policy that is heavy on the spirit of good behaviour and conduct, but light on regulation. Director conduct should be placed at the top of it.
3. The GC and CEO should sign a memorandum of understanding reflecting the reality of their relationship – and the reality that the GC role is a unique and tough one to execute – and which promises only to deliver seven things for $7.
The CEO must take responsibility for failure, especially if it is because they withheld budget from Legal, which prevented Legal from spending time on the important (though not urgent) matter of helping to create an ethical culture.
The GC and team – down to the most junior lawyer – are in a position to contribute ideas towards creating an ethical framework on a daily basis, because they see things others don’t.
Whilst contributing to the creation of an ethical culture is the responsibility of every team, in-house have a budgetary incentive to champion it. Helping the company avoid conduct risks makes it easier for them to justify their budgets. For many, that would be a blessed relief.