ETHICAL CHALLENGES IN THE ROLE OF IN-HOUSE COUNSEL.

• Author: Gunz, Hugh
• Position: 2018 Leet Business Law Symposium: Fiduciary Duty, Corporate Goals, and Shareholder Activism

CONTENTS INTRODUCTION I. THE EVOLUTION OF THE STUDY OF ETHICAL DECISION-MAKING BY PROFESSIONALS AND IN-HOUSE COUNSEL IN PARTICULAR II. ETHICAL DECISION-MAKING AND IN-HOUSE COUNSEL PRACTICE III. LESSONS LEARNED FOR THE ETHICAL ROLE OF PROFESSIONALS CONCLUSION INTRODUCTION

Understanding the subtle pressures and biases that influence the way we behave might provide a far more effective education for future practitioners than studying professional standards alone. In her companion piece to this Article, published in the same issue, Dr. Paula Schaefer highlights the obvious importance of considering ethical decision-making through the lens of the broad variety of behavioral factors that influence how individuals conduct themselves within organizations. (1) In her piece, Dr. Schaefer considers how context can provide far greater insight into actual decisions than simply a review of professional rules. Rules alone have failed to protect society from bad behavior by professionals.

It is tempting to begin this short analysis by referencing the most recent transgressions of those professionals in whom society places trust. It is interesting to study the history of any profession and observe how all writers (including ourselves), in whatever era and discussing whichever profession, motivate our work. (2) The basic question is always: where were the lawyers, accountants, actuaries, engineers, etc.? (3) Why did bad things happen? The follow up and more fundamental observation is this--there are few corporate frauds or failures that take place without the active assistance of professionals, all well versed in ethical principles. (4) How then do these transgressions occur?

The focus of this Article will not be major ethical breaches or active fraud by any individual professional. There have always been, and no doubt will continue to be, individuals for whom any sense of moral compass is lacking. When offered the opportunity to engage actively in unethical behavior, say fraud, they do not resist. Part of our disinterest in analyzing the behavior of the really bad actors is our general frustration with the common defense by those remaining in organizations, particularly in the 1990s and early 2000s- the defense of the solitary "bad apple." (5) By isolating bad decision-making to one or two individuals, the institutions in which the transgressors operate are effectively deemed free from responsibility. Moreover, short of imposing more and more effective control systems, little can be done to prevent the actions of the truly bad individuals if the actions are well executed.

The argument that will be made here, and indeed which is consistent with the work of Dr. Schaefer, is the need to focus upon the subtle shifts in behavior and reasoning that can result from the context in which all professionals operate, and which may, under certain conditions, lead to less than optimal ethical decision-making by anyone.

The panel for which this Article was originally prepared addressed the in-house counsel profession and, in particular, the ethical challenges its members face. This is not a new concern, although in the past the academic literature often addressed very specific professional practice issues such as that of attorney-client privilege. (6) Arguably, this focus evolved from the growth of in-house practice as a unique form of professional practice, distinct from law practice in general. (7) While this is not the place to explore the history of corporate counsel practice, (8) there is no doubt that the real impetus for its modern form followed from shifts within the overall profession, documented by the work of Chayes and Chayes and others. (9)

The discussion that follows will address first the evolution of the study of ethical decision-making by professionals and in-house counsel in particular. Second, it will consider Dr. Schaefer's interest in behavioral ethics within the framework of legal practice, including in-house counsel practice. The final section will consider how professions might better address their fundamental responsibility to meet society's needs.

1. THE EVOLUTION OF THE STUDY OF ETHICAL DECISION-MAKING BY PROFESSIONALS AND IN-HOUSE COUNSEL IN PARTICULAR

   There is little doubt that the evolution of the academic study of ethical decision-making was encouraged by the occurrence of major corporate scandals. While these have always existed, a useful beginning point in the modern era (10) might be the savings and loans crisis of the 1980s, (11) which spurred a flurry of exploration of the role that accountants played in particular events (and, to a lesser extent, lawyers). (12) There was no doubt that the primary focus of academic study was the role of independent professionals working within professional service firms ("PSFs") and auditors specifically. (13) However, there was also starting to be interest in the role of the employed professionals, those working within the often subsequently failed institutions. If we consider the ideal (or traditional) model of the professional practitioner as that of working within autonomous professional practice (the PSFs), what happens to decision-making by those same professionals when they are now directly employed by managers who do not owe the same allegiance to professional rules as does the employee professional? Rather, the manager has a primary responsibility to the entity for whom all parties work (non-professional organizations or "NPOs"). And, of course, this same responsibility is also owed by the employed professional.

   Academic writers responded to this question by making the observation that employed professionals effectively serve two masters; professionals must continue to meet the ethical obligations of their profession and also the same ethical obligations to the employing institution as does the manager. (14) Such a position was in turn assumed to give rise to what became known as Organizational-Professional Conflict ("OPC"); (15) the ethical demands of the external profession and the employer itself may conflict.

   Stepping back, professions generally exist by dint of a form of social contract. (16) They are provided a position of considerable privilege by society--often a monopoly over particular services (17) --and in return must exercise their art in a manner that is independent of self-interest and uphold the high-minded principles developed by the profession itself. In common law countries, members of professions also are held to be in a fiduciary relationship with their clients or users of services under particular circumstances. (18) At the same time, employers also have a right to command loyalty in decision-making by employees. While engineers, nurses and other professionals within employment relationships were the focus of the original studies of OPC, (19) members of the accounting profession became of particular concern often because of their key roles in failing to prevent--perhaps even enabling-corporate failures. (20)

   Although OPC was a logical proposition--that there may be inherent conflicts between the demands of the two sets of ethical obligations--there was in fact, at least initially, little evidence of professionals identifying such conflicts in practice. (21) Several empirical studies demonstrated that professionals seldom reported experiencing such conflicts. (22)

   Our own interest in these issues stemmed from studying the role of in-house counsel in organizations generally, and the question of the competing and even conflicting loyalties, or OPC, was intriguing. (23) The work on OPC focused on professions that in many respects originated from serving the needs of organizations, businesses, and commerce in particular. As such, it should not be such a surprise that members of those professions, whether they were engineers, scientists, or accountants, might arguably tend to resolve potential conflict in a manner consistent with the goals of the employer. (24) If this was to occur, they would also be less inclined to report significant levels of OPC. (25)

   Lawyers, in contrast, have a lengthy history as independent professionals (26) and have a particularly powerful external reference group in the form of the various bar associations and law societies. (27) Arguably, if there was ever a profession equipped to resist employer pressure to compromise professional ethical obligations, the law would be it. (28) Thus, we might expect the perceived experience of OPC to be higher for employed lawyers than that reported by other professions--for example, higher than accountants in particular. In our own study of a large sample of in-house counsel, this was, however, not in fact the case. Our findings of perceived OPC were remarkably consistent with those of other studies of different employed professionals. (29)

   At this stage, all we could do was posit possible explanations for this unexpected outcome. (30) We did observe that the more in-house counsel saw their careers moving into senior management itself--and there had long been evidence that this was a common career path (31) -the more committed they were to the employing organization and the less they reported experiencing OPC. (32) What might this mean? Perhaps our assumption that lawyers should experience OPC, because of the nature of their profession itself, was flawed. Was it possible that those entering the in-house profession, and thus becoming employed lawyers, are often quite different in terms of their professional expectations than those in PSFs? Maybe they simply miss the potential conflict because they are more inclined to think like a manager than a lawyer? Alternatively, might the results of our study suggest that lawyers are simply highly effective at balancing ethical responsibilities and therefore do not experience conflict? They find ways of ensuring they remain in compliance with their professional obligations. (33) More troubling, might it simply be the case that...