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Corporate governance is the cornerstone of ensuring that businesses operate ethically, responsibly, and efficiently. The UK Corporate Governance Code, established by the Financial Reporting Council (FRC), plays a pivotal role in promoting good corporate governance practices. However, a recent consultation on revising the code has sparked a crucial discussion about an important omission: the role of the general counsel (GC) and in-house legal teams. In this blog, we will explore why it is essential to acknowledge the contribution of GCs in decision-making, risk management, and corporate culture, and why their role should be explicitly recognized within the revised code.
The GC's Vital Role in Corporate Governance
General Counsels, or Chief Legal Officers, are central figures in modern corporations. They are responsible for managing legal affairs, ensuring compliance with laws and regulations, and providing legal guidance to the board and executive leadership. Their duties extend beyond just the legal aspects; they often find themselves deeply involved in decision-making processes, risk assessment, and shaping the corporate culture.
Decision-Making: GCs are not merely legal advisors; they are strategic partners who provide legal perspectives on critical business decisions. Their insight helps boards and executives make informed choices that align with the company's legal obligations and ethical principles. Failing to consult GCs in decision-making can lead to legal and reputational risks.
Risk Management: Identifying and mitigating risks is a fundamental aspect of corporate governance. GCs, with their legal expertise, are adept at assessing legal risks and proposing strategies to manage them. Ignoring their role in risk management can leave companies exposed to unforeseen legal challenges.
Corporate Culture: A strong corporate culture that values ethics and compliance is essential for good governance. GCs play a crucial role in shaping this culture by providing guidance on ethical standards and promoting a culture of compliance. Their influence can help prevent misconduct and unethical behaviour within the organization.
The Consultation Response: A Call for Recognition
The recent consultation response from dozens of in-house lawyers highlights a glaring omission in the revised UK Corporate Governance Code. They argue that the code should explicitly acknowledge the critical role of the GC and in-house legal teams in achieving corporate governance objectives. Their collective experience and academic research support the idea that in-house lawyers contribute significantly to risk mitigation and ethical decision-making.
The "Comply or Explain" Regime: A Mechanism for Accountability
To address this issue, the consultation response suggests amending the code to require all directors to have access to the GC, who would also have the right to attend all board and committee meetings. The proposal aligns with the "comply or explain" regime of the code. Under this regime, companies are expected to comply with the code's provisions or explain why they have chosen not to.
Including a provision that mandates access to the GC and their participation in board and committee meetings ensures transparency and accountability. Companies that choose not to implement this provision would need to provide a valid explanation. This mechanism reinforces the importance of the GC's role in corporate governance.
Weaknesses in Governance: A Critical Concern
Another point raised in the consultation response is the potential weakness in governance when the GC reports to individuals who do not sit on the board and may have conflicting priorities. This scenario underscores the need for explicit recognition of the GC's role within the code. Strengthening governance structures by ensuring the GC's direct involvement can mitigate such weaknesses and enhance corporate governance practices.
Conclusion: Recognizing the role of a General Counsel
In conclusion, the role of the general counsel and in-house legal teams in corporate governance cannot be understated. Their expertise in legal matters, risk management, and ethical guidance is invaluable for companies striving for good governance. It is only fitting that the revised UK Corporate Governance Code explicitly acknowledges their role and provides a mechanism for accountability.
The proposed amendment to grant all directors access to the GC and their participation in board and committee meetings aligns with the principles of transparency and accountability. It ensures that GCs are not sidelined in the decision-making process and have the opportunity to influence ethical conduct and risk management.
As the Financial Reporting Council continues to revise the code, it should seriously consider the consultation response from in-house lawyers and recognize that acknowledging the GC's role is not just a matter of good practice; it is essential for maintaining the integrity of corporate governance in the UK.
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