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WHAT BOARDS AND CEO’S NEED TO KNOW ABOUT THE POSITIONING

AND EVOLVING ROLE OF A CHIEF LEGAL OFFICER

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This paper highlights the value and importance of a direct reporting structure between the General Counsel (GC)/Chief Legal Officer (CLO) and the Chief Executive Officer (CEO), as well as direct access by the CLO to the Board of Directors (BOD). When a CLO can directly influence and shape corporate strategy and culture they are reflecting and reinforcing the values of their organisation. Having a well-positioned CLO enhances an organisation’s corporate culture as the CLO role supports corporate performance both within a compliance framework and an underlying legal and ethical context. It’s important to highlight the fact that the CLO is no longer simply a company lawyer. Today, the modern CLO advises the CEO and the BOD, not only on legal matters, but a wide range of strategic, compliance, ethical and operational issues that affect organisational decision-making. Their advice addresses not only what a company ‘can’ do from a legal perspective, but also what it ‘should’ do from a legal and ethical perspective. As such, CLOs must be appropriately positioned to have a positive influence on corporate culture, and to support CEOs and directors to discharge their duties lawfully, ethically and responsibly.

The pace of change in regulation, globalisation, technology and the growing expectation that organisations address environmental, social and governance issues ensures that a CLO’s role has broadened from that of technical legal adviser, to one of power and influence.1 CLOs are now increasingly a valued strategic advisor contributing to the business across a range of diverse areas including strategic planning, financial affairs, business processes, project and data management.2

For example, the growing area of technology, particularly cyber security, resulting in increasing data breaches and data protection vulnerabilities is another area of increasing focus for boards and their CLOs. ACC’s 2019 Chief Legal Officers Survey revealed that 68 percent of (CLO) respondents are extremely concerned with data breaches and the protection of corporate data. The legal obligations arising from increasing data protection regulation highlight the increasing value and influence of the CLO in cyber-security strategy and cyber-risk mitigation. With an increase in merger and acquisition (M&A) activity, and the consequential development/addition of new products, services or business practices, CLOs will also fulfil a strategic role in addressing the business opportunities, risks and threats in a legally permissible manner.

While a significant component of a CLO’s role is to protect the company, there are also opportunities to help the company adapt to a dynamic environment by leveraging their position and training in ways that promote a healthy culture of innovation.3 The CLO should play a role in creating a culture where managers can take risks and make mistakes in ways that do not endanger the organisation.4 This ability is enhanced when CLOs have a close communication line with the CEO and direct access to the BOD.

I n t ro d u c t i o n

M o re t h a n a L a w ye r

1. 2019 ACC Chief Legal Officers Survey.2. MinterEllison and ACC “Many different hats: the role of the modern general counsel” 2017.3. ACC Skills for the 21st Century General Counsel.4. Ibid.

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The CLO should play a role in creating a culture where managers can take risks and make mistakes in ways that do not endanger the organisation. This ability is enhanced when CLOs have a close communication line with the CEO and direct access to the Board of Directors.

Their advice addresses not only what a company ‘can’ do from a legal perspective, but also what it ‘should’ do from a legal and ethical perspective.

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Where CLOs previously played a more reactive role in reducing or repairing the reputational or financial damage for the company following an incident or instances of wrongdoing, today, the CLO plays a critical proactive and importantly preventative role in risk mitigation against internal and external threats that could divert the organisation from achieving its strategic and operational objectives. If CLOs are sidelined from corporate decision-making, their ability to prevent corporate wrongdoing may be seriously impeded. According to ACC’s 2019 Chief Legal Officers Survey, 76 percent of CLOs report to the CEO. These CLOs increase business input and send signals to the company and stakeholders that ethics and compliance are top priorities. This represents a marked increase from the 2018 report, which revealed only 64 percent of CLOs had a direct reporting line to the CEO. This increase shows that companies are increasingly aware of the significant role that their CLO can and should play within their organisations.

Following the 2019 Hayne Royal Commission report,5 the APRA Commonwealth Bank report6

and the changes to the ASX Principles7 there have been a significant change in the governance responsibilities of boards. Boards should now have increased awareness of their duties and responsibilities including:

• Director Duties and Responsibilities – acting in good faith and instilling a culture of acting lawfully, ethically and responsibly.

• Board Management Relations – including a need to sufficiently challenge management.

• Investigation and Oversight – satisfying themselves that they are receiving the right information and inputs from management to make complex decisions.

• Culture and Performance – assessing the entity’s culture and its governance and the relationship of these to strategic achievement.

A well-positioned CLO is key to satisfying the obligations above and can be a crucial ally as boards look to ensure compliance. The ACC 2019 CLO survey8 indicates the positive influence that a well-positioned CLO has on a company’s compliance and legal exposure. 

Following these recent board governance recommendations, the Australian Institute of Company Directors (AICD) has recently stated: ‘the senior executive team will usually be responsible for providing the board with accurate, timely and clear information on not only financial performance, but also compliance with material legal/regulatory requirements, and any conduct materially inconsistent with the entity’s values or code of conduct.’9 We contend that a well-positioned CLO is not only key to satisfying those obligations, but uniquely qualified to do so. In the CLO role, ethics, compliance, the law, and risk all come together meaning the CLO is qualified to spot risks before they become true misconduct – helping companies to maintain a strong ethical foundation. 

Th e A g e o f t h e C h i e f Le g a l O f f i c e r

G o ve r n a n c e c h a n g e s

5. Final Report: Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry. Volume 1.

6. Prudential Inquiry into the Commonwealth Bank of Australia, April 20187. ASX Corporate Governance Council. Corporate Governance Principles and Recommendations 4th Edition, February

20198. 2019 Association of Corporate Counsel (ACC) Chief Legal Officers Survey9. Changes to the latest ASX Corporate Governance Principles and Recommendations: https://aicd.companydirectors.

com.au/membership/company-director-magazine/2019-back-editions/april/update-corp-governance-principles

“the senior executive team will usually be responsible for providing the board with accurate, timely and clear information on not only financial performance, but also compliance with material legal/regulatory requirements, and any conduct materially inconsistent with the entity’s values or code of conduct.

Australian Institute of Company Directors

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The following insights provided by CLOs in Australia demonstrate the importance of having a direct reporting relationship with the CEO and direct access to the BOD.

I n s i g h t s o n t h e E f f e c t i ve n e s s o f R e p o r t i n g R e l a t i o n s h i p s f ro m G e n e r a l Co u n s e l / C h i e f Le g a l O f f i c e r s

Carmel reports directly to the CEO and is a member of the CEO’s Senior Leadership Team. She is also responsible for providing legal advice to the CEO, the board and senior management. She believes that having a reporting line ensures that CLOs will have visibility of all legal issues that might impact the company.10 She says, “In my view, it is preferable for the general counsel to be able to directly advise the CEO and board of legal issues – and that advice should not be filtered through another direct report of the CEO”.11 For Carmel, the drawbacks of not reporting directly to the CEO include:• The risk of ‘Chinese whispers’ where issues might be missed in translation.• Issues might be discussed at the CEO’s Senior Leadership Team meetings which

have legal repercussions that might be missed if there is no lawyer present.• The business will not benefit from the GC’s valuable whole-of-organisation legal

and business views and input in strategy.12

As GC for a franchising organisation involved in the sale of automotive components, Richard knows the important of the GC having a ‘seat at the table’ and a direct reporting line to the CEO and the board. Richard views the rise of CLOs reporting to the CEO as a “positive change”. He highlights that when the GC reports to a C-executive, GCs “gain unique insights into the strategic direction of the company and what’s happening next”. This allows the GC to “add value via identifying risk and challenges before they occur”. Richard has three critical deliverables in his role:• Reducing risk by identifying concerns that could breach contracts or regulatory

requirements.• Adding value through commercially driven legal advice that provides solutions to

problems faced by the business.• Ensuring that all regulatory compliance is achieved on time and to a high

standard.

Richard is able to meet these deliverables because he has direct access to the CEO. This enables him to “know how to prioritise them depending on their importance to the CEO” and by discussing them with the CEO it “helps him understand how to approach them.” This also impacts reporting to the BOD in a way that makes him “more accountable to making firm and identifiable progress on them between board meetings”. He is able to show that he is “in control and can be trusted to ensure that the company is in safe hands”.

Carmel Mulhern

Group General Counsel and Group Executive Corporate Affairs at Telstra

R ichard Gi l l

Genera l Counsel , TJM

10. The 2017 Benchmarks and Leading Practices Report p 47.11. Ibid p 49.12. Ibid.

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Some GCs have identified they face difficulty in communicating with the CEO. Richard offers that getting in contact with the CEO’s executive assistant to organise a face-to-face chat or even simply sending a text message or starting a video message are effective measures the GC can take to communicate with the CEO. Further, some GCs acknowledge that they struggle to maintain a legal mindset, Richard advises that “the CEO’s responsibility is to set the business strategy and the GC’s role is to support and guide them towards achieving it”.

Richard believes that CLOs can improve their role as a corporate influencer by “being patient, a good listener and prepared to learn more about the company and its strategy every day.” By making “solid connections within the Executive and learning the company politics” the GC will be seen as a “cheerleader, rather than a negative influence”.

No job is without its challenges, and this is the same for the CLO. Many CLOs observe that they wear ‘many different hats’ and need to be conscious of ‘what hat they’re wearing in every particular situation’.13 By being a part of business discussions, lawyers should be aware that their mindset might not only be legal – they also have an overarching awareness of compliance and ethical concerns. This means that if even CLOs are engaging across multiple business units, they should be observing through a legal lens. This is an important function to have, as a CLO should be able to diagnose an organisation’s appetite for risk and whether the vulnerabilities involved are purely legal in nature or also involve a business function such as sales or public relations.14

CLOs have also identified that when they did not have the ear of the CEO, and they knew the organisation was on the wrong course, they had to work hard to convey the message through other people, up to and including the CEO’s personal assistant. This highlights the importance of the CLO having a unique voice within the organisation and, critically, an effective direct reporting line to the CEO in order to operate within an effective risk compliance framework. This is instrumental in protecting a company’s operational performance.

CLOs have also identified legal privilege as a challenge they face within their role. With in-house counsel taking on more commercial responsibilities, it has never been more important for CLOs to recognise legal professional privilege in relation to legal advice and commercial advice. In-house counsel often have legal and non-legal responsibilities, and privilege will only apply to work performed by the in-house counsel in their legal capacity. By keeping these responsibilities as separate as possible, CLOs will minimise the risk of having legal advice being viewed by a court as commercial advice to which privilege does not apply. This is particularly so where a CLO performs a dual role as Company Secretary CLOs must ensure that they are independent so that personal loyalties, duties or interests do not influence the legal advice they give.

Th e s h i f t i n g c o n c e r n s o f G e n e r a l Co u n s e l

13. MinterEllison and ACC “Many different hats: the role of the modern general counsel” 2017.14. MinterEllison and ACC “Many different hats: the role of the modern general counsel” 2017.

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As described by one CLO, “of course you have responsibilities to provide legal advice, but you’re also meant to be part of the business – not sitting on the sidelines, writing lengthy advice and throwing it over the fence.”15 This illustrates that it is crucial for the CLO to fulfill their role in promoting compliance and ethics in order to discuss business strategies with C-suite executives. In ACC’s Skills for the 21st Century General Counsel survey, 54 percent of directors ranked “ensuring a company’s compliance with relevant regulations” as one of the top three ways CLOs provide value to the company. Companies with a strong corporate culture also look to their CLO and their team to proactively advise on and promote a risk-aware culture within the organisation.

Businesses are now more global than ever, with business decision-making becoming more multi-dimensional and multi-disciplinary.16 Importantly, just as the global business environment has changed, the role of the CLO has also changed. Having fundamentally shifted from one that was characterised by remediation, to that of a proactive strategic advisor to the wider organisation, and of a driver of a corporate culture that reinforces the delivery of operational outcomes within a framework of legal and ethical compliance. Therefore, given both the broadening organisational contributions offered by the CLO and the increasing range of compliance and data protection issues impacting organisations, boards and CEOs must be aware that the positioning of the CLO is a critical issue. The absence of direct access between the CEO, BOD and the CLO significantly inhibits the delivery of effective counsel to the organisation thereby impeding the BOD’s ability to properly discharge its duties, including the development and maintenance of a legal and ethically compliant corporate culture.

Written on behalf of the Association of Corporate Counsel (ACC) Australia.With thanks to Debbie Boutros for her contribution to this paper.

Th e C LO s C l i e n t i s t h e Co m p a n y

Co n c l u s i o n

15. Ibid.16. On Leadership: An Interview with Kenneth C. Frazier, President and CEO of Merck & Co, Inc.

“of course you have responsibilities to provide legal advice, but you’re also meant to be part of the business – not sitting on the sidelines, writing lengthy advice and throwing it over the fence.