Swallow: Critical opportunity
A group of general counsel have called on the Financial Reporting Council (FRC) to set out the role in the UK Corporate Governance Code and suggested how it could be done.
The GCs said that, at a “critical moment for society” in terms of demands for increased corporate responsibility and transparency, the lack of any reference to the role of general counsel in the code or supporting guidance was “extraordinary”.
Responding to the FRC’s consultation on revisions to the code, the group of 30 GCs and ‘interested parties’ said the “most significant observation underpinning our response” was that the general counsel (or chief legal officer) of any company has “fundamental professional duties” that aligned with and reinforced the corporate governance objectives of the FRC and the code.
“This is all the more important given that in some organisations there is weakness in governance from the general counsel reporting to individuals who themselves do not sit on the board and who may have operationally conflicting priorities.
“In this respect, we maintain that the FRC’s intentions through issuing the code are actually undermined and can be remedied as a priority through this consultation process.”
As they were “frequently responsible for dealing with the fallout of failings in culture”, the GCs “strongly” agreed with the FRC’s emphasis on the issue and expected the revised code to “reflect the benefit in the general counsel being an integral role in creating and maintaining a strong and healthy corporate culture”.
The code and its guidance should be “explicit in identifying the key nature” of an effective GC in support of the company’s board, the audit committee and other functions to ensure strong governance over risk management.
“Further, while the general counsel role is not yet formalised in legislation as in other jurisdictions, we recommend including a direction in the code for organisations above a certain size and risk profile, to demonstrate how they are operationally managing legal and associated risks, for example by having an internal legal function or external legal advisors with full access and oversight.
“We also recommend strong best practice guidance for companies that have a statutory duty to appoint a company secretary, also to have a general counsel or equivalent.”
The GCs said the code and its guidance should incorporate the GC role in supporting the preparation of financial reporting if the FRC wanted to “optimise best practice”.
GCs often advised the finance function and the audit committee on reporting rules as well as matters relating to corporate transactions and corporate litigation/enforcement cases, the response said.
Studies found that organisations with GCs in top leadership positions had “lower audit costs based on default and financial misstatement risk and fewer stock price crashes”.
The GCs made further detailed proposals for “incorporating specific principles, provisions and guidance” relating to responsibilities in the code and guidance, such as board access to GCs, while the GC should have the right to attend all board and board committee meetings.
Posting the response on LinkedIn, consultant and former GC Jenifer Swallow, described the FRC’s consultation as a “critical opportunity to address a historic omission: failure to formalise in regulation the role of general counsel and in-house legal departments in decision making, risk management and corporate culture”.
Ms Swallow called on other GCs to sign the response.
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