The risk-reward conundrum

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A GC’s ability to play a lawyer-guardian type role in a company is critical, writes Neeta Sanghavi

The purpose of corporate governance is to facilitate effective entrepreneurial and prudent management that can deliver the long-term success of a company. Under Basel requirements, corporate governance should be an independent function so that it works fearlessly and independently.

A company’s integrity and its business reputation are critical in today’s global business environment, and the general counsel is in precisely the right position to assure that the board recognizes this and acts accordingly. Playing a proactive role to encourage a corporate culture of ethical behaviour and compliance is of paramount importance.

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Neeta Sanghvi

In this context, the co-operation and influence of the GC vis-a-vis the board of directors often gets less attention than it should. But this relationship is more relevant than ever due to growing requirements in surveillance and guidance of core business activities and strategic direction, as well as their deeper involvement in key topics like audit and compliance, nomination and remuneration of executive management, and social responsibility. Besides offering legal expertise and advising on risk exposure, liability, compliance and governance, the GCs take a broader view that encompasses the company’s reputation and integrity.

The ideal modern GC should be a lawyer-guardian who is an astute lawyer, a wise counsellor and company leader who plays a major role in assisting the corporation achieve that amalgamation of ethical values and integrity, which should be the foundation of global capitalism.

A KMPG global survey of 320 in-house counsel across 32 countries last year revealed that more than a third (38%) sat on the board of their company. GCs are no longer working in a silo, focusing purely on detail, logic and fact. With compliance pulling in close to revenue at the top of the boardroom agenda, the in-house counsel must act as the personification of best practice for an organization. In India, however, this is something that is more preached than practised.

High integrity for GCs means robust adherence to the letter and spirit of formal rules, both legal and financial. It involves understanding and mitigating other types of risk beyond direct economic risk. The essence of being a lawyer-guardian is to move beyond the first question, “is it legal?” to the larger question, “is it right?”

Such a role involves leadership, or shared responsibility, not just for the corporation’s legal matters but for its positions on ethics, reputation, public policy, communications, corporate citizenship, country and geopolitical trends.

Although the role of a GC has been transformed in recent years, one dimension remains the same: a reliance on a good relationship with the CEO. To thrive at the boardroom level, the in-house counsel must have the technical skills, the right personality, commercial imperative and an understanding of the board.

Being the guardian of the corporation, the GC also needs to consider whether a particular solution meets the “spirit” of the regulation/law. While analysing the “risk v reward” situation, the GC not only needs to keep in mind the effect that the decision will have on the relevant business leader, but also on the other stakeholders, which include regulators, the larger public interest, employees and shareholders.

In relation to the largest M&A deals in e-commerce in India such as Walmart’s acquisition of Flipkart, it was clear that foreign direct investment (FDI) norms in e-commerce only permitted the marketplace model, that is, for an online platform to connect buyers and sellers, and not have inventory of its own. To later cry foul of the new Indian policy was probably a misjudgement of the intent of the e-commerce FDI policy.

The stratospheric quantum of loss suffered in the IL&FS scandal can be ascribed to a syndrome where laws/regulations, ethics, spirit and “doing what is right” were put on the back burner. This begs the question of whether the lawyers involved were excluded from decisions, or whether their guidance was superseded.

I do not believe that the choice for GC is to be a “yes person” for business leaders, or to be a conservative, inveterate naysayer. The role of the GC requires great leadership skills. A GC has to oversee the company’s legal issues, and be responsible for managing the internal department and external counsel, all with a global perspective and keeping a close control on the budget to maintain profitability.

Many corporates now regard their in-house legal function as their primary legal resource, which should be capable of carrying out most of the company’s legal needs.

To sum up, the ability of a GC to play the kind of lawyer-guardian role that corporate governance actually requires is crucial in today’s world. It is therefore imperative that the decision of the GC should have the backing of the CEO. This implies that the reporting of the GC should be to the CEO/board, and that this is how a CEO can “set the tone” for the organization.

Neeta Sanghavi is general counsel of the Avendus Group. The views expressed in this article are personal