What role does the co-op attorney play in governance?

• Author: Steiner, Tracey

When you think about the term "governance," who first comes to mind? Likely, it is the board of directors and top management. But key advisors, like cooperative attorneys, should not be ignored when thinking about governance. After all, aren't attorneys supposed to keep their clients out of trouble? Shouldn't they be trying to rein in wayward officers and remind them of their fiduciary obligations? And don't attorneys guide directors and managers by explaining legal and compliance risks and potential liability?

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Attorneys do, in fact, have an important rote in governance. Some prominent legal commentators, courts and state bar associations are encouraging attorneys to be more proactive in counseling their organizational clients to try to avoid the governance failures that seem to be occurring too often in this decade. This article explores the evolving role of attorneys in corporate governance today, particularly attorneys for electric cooperatives. It does not presume that there is a "one size fits all" type of attorney that will best serve the needs of all electric cooperatives. Instead, the goal is to call attention to the various functions that an attorney can perform in assisting cooperative boards and management as welt as describe applicable ethics rules and current expectations for attorneys.

The Fall 2003 issue of Management Quarterly featured an article by NRECA, the National Rural Utilities Cooperative Finance Corporation and Federated Rural Electric Insurance Exchange titled, "Governance & Accountability in Today's Business Climate: How Do Electric Cooperatives Measure Up." In that article, the authors noted that:

New "best practices" ... in governance are emerging. With the prospect of more rules and regulations being applicable to all businesses, including cooperatives, it is important that electric cooperatives focus their attention on ensuring good governance practices and responsible and accountable financial management. A cooperative's chief advisors, its attorneys, auditors and accounting firm, also are likely to be impacted by the cascade effect. For attorneys, this means reaffirming that their duty to an organizational client is the entity itself and not the individuals who manage that organization or make up its board. It is likely that attorneys will be called upon to take a more proactive role in reporting legal concerns "up the ladder" within the organization and more affirmative steps to see that the organization's management and/or board appropriately investigate and respond ... (1) (Emphasis added.) Seven years later, it seems these predictions were correct. A crystal ball was not required because much was being written in 2003, right after the collapse of Enron, about governance. Notably, the American Bar Association had convened a Presidential Task Force on Corporate Responsibility. This task force released a report (2) describing the responsibilities that lawyers for corporations have in governance:

Lawyers are and should be important participants in corporate governance and important contributors to corporate responsibility ... lawyers often serve as counselors to the board to assist it in performing its oversight function ... lawyers obviously do and should play a critical role in helping the corporation recognize, understand and comply with applicable laws and regulations, as well as to identify and evaluate business risks associated with legal issues. (3) (Emphasis added.) The ABA Task Force Report also contained several recommended changes to the ABA Model Rules of Professional Conduct, which were adopted later that same year. These model rules form the foundation of most state bar associations' professional conduct rules for attorneys, though states are free to deviate from or decline to adopt the ABA's language. (4)

Ethical Rules for Cooperative Attorneys

First, Understand Who the Client Really Is. ABA Model Rule 1.13 clarifies that an attorney representing an organization works for the entity, not the chief executive and not the board of directors. While in most cases, the interests of those charged with governing an organization align with the best interests of the organization, this rule requires that lawyers put the organization's interests ahead of those individuals. Sometimes boards and managers may not fully understand this important point. Clarity regarding who the attorney represents is of paramount importance when the decisions being made by the board or management could put a cooperative at serious risk.

Under ABA Model Rule 1.13(b), an attorney has an obligation to "proceed as is reasonably necessary in the best interest of the organization" when the attorney knows that the decisions, actions or inactions of the board or management will substantially injure the cooperative or result in a violation of law for which the cooperative could be held legally responsible. This rule requires actual knowledge on the part of the attorney before the attorney is required act, and that action may be in a way that is contrary to the wishes of directors or managers. For example, when there has been a dear violation of law that the board refuses to address and that will likely cause substantial harm to the cooperative, an attorney may reveal confidential client information to outsiders, such as government authorities. Thankfully, such situations are rare. More likely to occur is a situation where an attorney simply disagrees with a decision being made or would prefer that a different, less risky course of action be pursued. But, in acting in the organization's best interests, a lawyer is not to substitute his or her judgment for that of the board or management. The commentary to Rule 1.13 explains: "When constituents of the organization make decisions for it, the decisions ordinarily must be accepted by the lawyer even if their utility or prudence is doubtful." (5) So how would this play out in real life?

Imagine that a cooperative attorney...