When conflicts arise: tales of an angry board.

• Author: Atkins, Betsy
• Position: Legal Counsel For The Board

WHILE OVER the past two years we have been closely reexamining how the outside auditor, the CFO, and the audit committee perform their roles in support of the board, another board resource requires evaluation. What can the board expect from in-house counsel and external counsel?

These roles and expectations are not always clear. The board must make business judgments and decisions that serve the long-term interests of the shareholders. To responsibly discharge their duty of care and duty of loyalty, directors need clear access to objective legal advice.

Whose job is it to objectively advise the board when the company may be straying into the gray zone? If directors rely only on inside counsel, are they doing a thorough job in discharging their responsibilities as a fiduciary for the shareholders? Isn't relying only on inside counsel like relying only on the CFO and not checking with the outside auditors?

Who is the client?

Inside counsel, when discharging their role of putting the most persuasive argument forward for the corporation, is no longer objective. Who is inside counsel's client? I believe the corporation is the inside counsel's client, not the board of directors.

After all, the corporation hires and fires inside counsel and provides the organizational structure in which inside counsel reports. The corporation sets inside counsel's priorities--whether it's negotiating distribution channel contracts, preparing patent applications, or a myriad of other assignments.

Conflicts arise when a question of poor corporate conduct or management judgment surfaces to the board. Then the board must ask: Where was our inside counsel? Why weren't they aware of the problem--such as the sales force purloining the competitor's price list or engaging in foreign corrupt practices (as we will see in the following cases)? Beyond malfeasance, inside counsel may be inherently conflicted on so many tough, tricky questions that arise--as just one example, determining if a director candidate supported by management meets the legal definition (and more important, the spirit) of independence.

An independent legal and guidance resource needs to be identified, and that role clarified for the board. I posit that the independent "check and balance" function of the board can best be supported by outside counsel. Outside counsel should be the independent "guidepost" or resource to inform the board of conflicts, legal risks, and improper practices should any occur...