Years ago, I spoke with a friend about the job she had landed as the general counsel of a company in Dallas. "It was as though I had been taken to a field of rocks," she said, "and told that my job was to turn over each and every one of them to see what crawled out."
Later, when I left private practice myself to take my first job as general counsel, I remembered her comment. But I also realized before too long that it's not just the rocks you pick up that can pose a problem, it's also the rocks you haven't even seen yet.
Corporate governance can refer to many things. Sometimes it refers to shareholder rights. Sometimes it refers to the election and responsibilities of directors. And sometimes it involves issues that many executives wouldn't even think to consult a lawyer about.
For example, I know of at least two instances when high-tech companies created potentially serious privacy issues for themselves because of the choices they made when they developed a particular product. The first had to do with Facebook's launch of its Beacon feature several years ago, which let users' online "friends" know about the users' online purchases. No doubt that would have spoiled a lot of holiday and birthday surprises had it not been quickly changed to an opt-in function. It also could have led to much more serious privacy concerns. And this wasn't an isolated incident: Last November the FTC announced the settlement of a complaint against Facebook alleging that the social network service repeatedly violated privacy promises it made to its users.
The second tech company I'm thinking of made an engineering-driven change to a product that, it could be argued, allowed for the unauthorized collection of personal data from consumers. The general counsel found out about it purely by accident after a member of his legal team was using the product, and was alert enough to appreciate the change's implications.
In these tough economic times we GCs almost never get all the resources that we need or want. And even when we do, we cannot be everywhere at once and know everything that's going on. We do know that there is a business to run, and that there are quarterly targets to hit and legitimate goals to be achieved. In fact, one of the things I most appreciate about my job is that I have a much more intimate knowledge of my client now than I ever did in my 18 years as outside counsel at a law firm.
But close contact has a downside as well, for if you are not careful you can lose sight of the bigger picture.
Any effort by a company to surreptitiously seek out the phone records of reporters, executives, or even board members would, you'd think, cause alarm bells to ring in any general counsel's office. But what if it's the chairman of the board who's asking for this information? What if the company employs an outside investigator who gives assurances that this activity is well within the law? And what if experienced counsel validates those assurances? That's what happened at Hewlett-Packard a few years ago, and it did not turn out well.
You may also recall that in recent years a number of Silicon Valley companies got into trouble for backdating stock options. Of course, no reputable HR professional, no CEO, and certainly no general counsel would ever want to risk bringing down the wrath of the Securities and Exchange Commission. But when your company is trying to attract and retain the most talented employees, ensure the corporation's continued success, and enhance shareholder value, critical questions can easily go unaddressed.
Where were the GCs in these cases? In some instances they may not have known of the questionable practices. In others, they may have taken comfort from the knowledge that many companies were doing the same thing. Or they may not have realized that the core problem threatened the accuracy of the company's financial reporting. Perhaps the GCs didn't have the financial sophistication to fully understand what was going on, or they never talked it through with their CFOs. Or maybe they made a judgment call about the materiality of the violation.
Of all the corporate disasters that I know of, though, the one involving perhaps the most egregious breakdown of corporate governance practices was the bribery scandal at the German engineering group Siemens AG. As documented in the settlement deal that the company ultimately struck with the U.S. Department of Justice, Siemens had, over the course of at least six years, paid out more than $1.4 billion in bribes to government officials all over the world. There was nothing subtle about what was going on-nothing that even remotely approached a close call. A major western corporation had simply lost its way, and it took a series of raids of Siemens's offices and executives' homes by the Munich prosecutor in 2006 to bring the matter to light.
In the end, of course, a general counsel cannot be indifferent to important business objectives and the constant pressure to "make the numbers." But the GC also must be the one to balance those goals against a longer-term perspective. The general counsel is an employee of the company, a key member of the senior management team, and an important counselor to the CEO and the board of directors. But the GC is also a lawyer, and must never forget the ethical and professional responsibilities that go with that calling.
Rich Gray is the Silicon Valley-based vice president and group general counsel of Spirent Communications.
Kari Santos
Daily Journal Staff Writer
