In a post-Hayne Royal Commission world, should GCs be their organisation’s sole moral compass? Are their increasingly expanding roles jeopardising their ability to provide independent advice?
These were among the questions being explored by KPMG in their recent report: Restoring Corporate Trust: What it means for the General Counsel. As they acknowledge, their findings were not as predictable as might have been expected.
Who Should Drive Integrity Across The Organisation?
In seeking to answer this question, representatives from KPMG’s Forensic team spoke to senior management in large companies, who in turn directed them to speak to General Counsel. They went on to interview GCs from a combination of ASX100 companies, large privately held business, not-for-profits, and the public sector. At the report’s launch at the Australian Corporate Counsel’s (ACC) 25th In-House Legal National Conference, KPMG Partner Dean Mitchell joked that they spoke with 27 GCs, and ended up with 85 opinions. But there were several key questions that were answered in these discussions.
1. Should GCs Only Give Legal Advice or Embrace Broader Roles?
KPMG found that GCs were divided on this. While most believed that broader roles were appropriate, there was still a “significant minority” who hold what Mitchell loosely called a ‘purist view’: that GCs should return to their core functions. This view was much stronger among GCs from highly regulated industries like financial services. Post-Hayne, “there were a few battered or worse for wear GCs who wanted to go back to their traditional role,” he said.
Mitchell cited a GC from the banking sector: “If we learnt anything from the Royal Commission it was that the General Counsel must be there, calling it like it is. In my view it’s pretty simple, the GC should stick to their knitting.” These GCs were concerned about the challenge of being actively involved in commercial decisions while retaining their role as the business’ conscience.
While it is not unusual for GCs to take on the role of company secretary, KPMG also spoke to GCs who had multiple departments reporting into them - such as sustainability, IT and human resources - with no obvious rationale as to why they had been assigned to the GC. In some cases, it was because ‘no one else wanted it’, while another GC told KPMG that their role was expanded until it was senior enough to report to the CEO.
“Whether we want a broader role or not is largely a moot point, if the General Counsel wants a seat at the table, which they need in order to do their job effectively, then they must have broader responsibility across the company,” one ASX 100 GC told KPMG.
Mitchell noted: “The one thing every GC agreed on was that if you want them to be effective, they have to have direct, or at least a dotted line, to the CEO or executive director. When we looked at the ASX 100 and the reporting structures, it was incredibly inconsistent.” Around 60% of the interviewed GCs said they report to the CEO, but the remaining 40% report to a myriad of roles, including the Chief Financial Officer and the Chief Operating Officer.
2. Which Additional Roles Are Appropriate For GCs?
Mitchell said there was close to universal agreement that if the GC took on a broader role, then managing Corporate Governance is the role of choice. They identified five key areas of governance that GCs could play a role in:
- Corporate strategy and risk management;
- CEO succession planning;
- Executive compensation; and
- Crisis management.
However, when it came to whether GCs should also perform the company secretary role, opinions were equally divided. Interestingly, Mitchell reported that GCs who were company secretaries typically said that GCs should not have both roles, while those who were not company secretaries believed that they should be. In particular, they felt having the dual role would give them access to the Board, and that having a broader view of the organisation helped them perform their role as GC.
KPMG found that those GCs who do not believe they should hold the dual role had two clear justifications:
- the roles are too much work for one person (at least, for GCs in listed companies), making it hard to perform both roles effectively; and
- the dual role can lead to “irreconcilable conflicts, or at least lead to confusion as to which hat is being worn”.
Speaking at the Report’s launch, PPG Regional Counsel Nick Galloway, said that he had come to the ‘slightly uncomfortable’ view that GCs should not hold the company secretary role. “I worry that we will lose sight of our core role, to provide legal advice,” he said. “If we’re not giving legal advice, we’re performing a different role.”
Craig Masarei, who is both Head of Legal and company secretary for the Water Corporation of West Australia, felt differently. “The view that we hold is that you’re in a better position to provide stewardship in the organisation on the question of law, but also on questions of values and ethics,” he said. Masarei advocated for GCs to “work on the business, not just in the business”, saying that GCs should understand their organisation’s corporate objectives and values, and structure their practice around value-adding to the business.
3. Should General Counsel Act as an Organisation’s Moral Compass?
While companies in the US have increasingly introduced the role of Chief Ethics Officer into their organisation, most GCs are not keen to see the role embraced in Australia. That said, they are also not keen to be their organisation’s sole moral barometer.
“It’s not that they shouldn’t do it, but they shouldn’t have the responsibility of doing it, because it takes away from everyone else in the organisation asking the question: ‘should we, not could we’,” KPMG’s Mitchell said. Giving one person the responsibility for that kind of ethical question gives people a ‘hospital pass’, he said.
GCs interviewed by KPMG supported the idea of being able to influence ‘morally precarious decisions within their organisation’, as they were well-placed and trained to do so. West Australia Water Corporation’s Craig Masarei said that his organisation managed the situation by creating a strict accountability model, defining each role’s accountabilities and how they will be discharged.
While there is still debate about whether GCs should take on an expanded role in their organisation, KPMG’s report found that most GCs believe it is appropriate that they do so. An expanded role means a GC is more likely to report to the CEO, directly or via a dotted line, given them access to the executive. This, in turn, gives them a broader understanding of what is happening in the business, making it easier for them to do their job more effectively. There was strong consensus that GCs should take on governance roles, but conflicted views on whether they should also be company secretary. Regardless, in this post-Hayne world, it is clear that GCs have a lot on their plate.
Laini Bennett is Head of Content at LegalVision. She is responsible for LegalVision’s freely available database of articles and publications. LegalVision is a market disruptor in the commercial legal services industry and provides a range of legal solutions specifically directed at large corporates, fast-growing businesses and enterprise clients that have a higher volume of legal needs. The firm was recently named the 'Fastest Growing Law Firm in the Asia-Pacific' by the Financial Times.